Fed's favorite inflation reading highlights last week of Q2: What to know this week

The final trading week of the month, the quarter, and the first half of 2024 will greet investors with a key inflation reading, a light smattering of corporate results, and a rush to superlatives to characterize another consensus-busting period for markets.

Friday morning will bring investors the May reading on the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation measure, which should show prices on a "core" basis — which excludes food and energy — rose 0.1% last month. This would mark the slowest monthly rise since last November.

On an annual basis, core PCE inflation should jump 2.6%, the least since March 2021.

Earlier this month, the Consumer Price Index (CPI) showed inflation continuing to cool, a report that bolstered investor bets the Federal Reserve would cut rates later this year. Fed forecasts released June 12 showed the central bank expects to cut rates at least once in 2024.

The earnings calendar will remain in a lull this week, and results from FedEx (FDX) on Tuesday, Micron (MU) on Wednesday, and Nike (NKE) on Thursday will serve as highlights.

Micron's report will be most closely watched for signs of how robust AI demand remains across its portfolio. Nike's report comes at a crucial time for the retailer, which has seen shares fall 11% this year as it works to fend off competition in its core athletic footwear market from rivals like Adidas and relative upstarts like On (ONON) and Deckers's (DECK) Hoka brand.

Outside of market hours, some investor attention will also likely be paid to Thursday night's presidential debate between President Biden and former President Donald Trump, the first of two debates currently scheduled between the presumptive nominees.

Last year, the AI trade took markets by storm. The S&P 500 rose over 22%, and the Nasdaq gained nearly 40%.

Coming into 2024, one of the most popular calls on Wall Street was that this rally would broaden, bringing in lagging sectors of the market that were overlooked amid last year's "AI Everything" rally.

Through the first months of 2024, however, little has changed.

The performance spread between the S&P 500 and Nasdaq has narrowed — the S&P 500 is over 14% this year, the Nasdaq over 17% — but the Dow remains a laggard, rising just 3.8% so far in 2024.

Meanwhile, AI-related plays like Nvidia (NVDA), Super Micro Computer (SMCI), Broadcom (AVGO), and the aforementioned Micron are among the best performers in the S&P 500 so far this year. AI-related energy plays Vistra (VST) and Constellation (CEG) are also among the best performers in the index year to date.

"The rally in the first half of the year showed value in 'staying the course,'" wrote John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.

"In our view, the sharp reversal in the direction of bond yields in late 2023 and the attendant rally in stocks since that time illustrates the importance of investor patience and adherence to diversified portfolio allocations. Equities have made further gains in Q2 despite evidence of economic slowing. The rally in equity markets in Q4 that continued well into the first half of this year highlights the need to stay invested."

NEW YORK, NEW YORK - MAY 24: Traders work on the floor of the New York Stock Exchange during morning trading on May 24, 2024 in New York City. Stocks rose at the opening bell a day after the Dow Jones closed under 600 points, its worst session in more than a year. (Photo by Michael M. Santiago/Getty Images)
Traders work on the floor of the New York Stock Exchange during morning trading on May 24, 2024 in New York City. (Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)

In modern markets, for better or worse, earnings seasons don't really end.

But as Wall Street strategists look to put a bow on first quarter earnings with second quarter results about to come in starting after the July 4 holiday, Dubravko Lakos-Bujas and the equity strategy team at JPMorgan highlighted four key themes in a note to clients on Friday morning.

The first, of course, is AI.

AI investment, strategies, and all manner of references peppered earnings calls throughout the quarter. Data from FactSet showed 199 members of the S&P 500 mentioned AI on their earnings calls through late May.

JPMorgan's team noted companies remain "constructive around the AI theme making announcements of additional capex spend, new AI models and updates on ongoing organization reorientation towards providing AI products."

The second theme is weight-loss drugs.

The best-performing stocks in the S&P 500 this year are mostly focused on AI plays. Sitting on the eighth-best year-to-date gains of 52% is Eli Lilly (LLY), manufacturer of the popular weight loss drugs Mounjaro and Zepbound.

Eli Lilly is now also the eighth-largest company in the S&P 500 with a market cap north of $800 billion.

The US consumer is the third key theme coming out of earnings season.

Specifically, what JPMorgan called "growing caveats on the level of resilience given consumer pushback on pricing, trade-downs and value-seeking behavior especially among low-income consumers."

As Walmart (WMT) CFO John David Rainey told Yahoo Finance back in May, "We see that wallets are still stretched, [customers are] still looking for value."

Last week, retail sales data for May showed sales rose at a slower pace than forecast, while April's sales were revised down sharply. At least one economist said this report adds to "signs that [consumers] are struggling a little."

With consumer spending accounting for around two-thirds of US GDP growth, how cautiously — or boldly — shoppers are reaching into their wallets is always a key input for investors.

A Walmart truck pulls into a Walmart Distribution Center in Hurricane, Utah on May 30, 2024. (Photo by GEORGE FREY / AFP) (Photo by GEORGE FREY/AFP via Getty Images)
A Walmart truck pulls into a Walmart Distribution Center in Hurricane, Utah, on May 30, 2024. (GEORGE FREY/AFP via Getty Images) (GEORGE FREY via Getty Images)

The final theme flagged by JPMorgan's team was "expense management," which, like AI, is another holdover from prior years.

In 2022, as tech stocks got whacked with rates rising, layoffs began to sweep an industry that had aggressively scooped up talent in 2020-21. Continued clean-up on costs in 2023 helped investors grow excited about profit margins heading into 2024.

And management teams still have plenty of cover from the broader environment to continue slimming down their employee ranks or pulling back on other expenses.

"We also remain focused on long-term efforts to durably reengineer our cost base," Alphabet (GOOG) CEO Sundar Pichai told investors in late April.

"We continue to manage our headcount growth and align teams with our highest-priority areas. This speeds up decision making, reduces layers, and enables us to invest in the right areas."

At the end of its first quarter, Alphabet employed about 10,000 fewer people than a year ago. Earlier this month, the tech behemoth announced it had hired a new CFO.

Economic data: Dallas Fed Manufacturing, June (-14.9 expected, -19.4 previously)

Earnings: No notable earnings scheduled for release.

Economic data: S&P CoreLogic Case-Shiller home prices, April (+0.33% month-over-month previously); FHFA home price index, April (+0.1% month-over-month previously); Conference Board Consumer Confidence, June (100 expected, 102 previously); Richmond Fed manufacturing, June (0 previously)

Earnings: FedEx (FDX), Carnival (CCL), TD SYNNEX (SNX), Progress Software (PRGS)

Economic data: MBA mortgage applications, week of June 21 (+0.9% previously); New home sales, May (+2.5% expected, -4.7% previously)

Earnings: Micron (MU), BlackBerry (BB), General Mills (GIS), Paychex (PAYX), Levi Strauss (LEVI), Jefferies (JEF), Concentrix (CNXC), AeroVironment (AVAV), MillerKnoll (MLKN)

Economic data: First quarter GDP, third estimate (+1.4% annualized rate expected, +1.3% previously); Initial jobless claims, week of June 22 (238,000 previously); Durable goods orders, May (+0.1% expected, +0.6% previously); Pending home sales, May (-7.7% previously): Kansas City Fed manufacturing activity, June (-2 previously)

Earnings: Nike (NKE), Walgreens (WBA), McCormick (MKC), Acuity Brands (AYI), American Outdoor Brands (AOUT)

Economic data: PCE inflation, month-over-month, May (+0% expected, +0.3% previously); PCE inflation, year-over-year, May (+2.6% expected, +2.7% previously); Core PCE inflation, month-over-month, May (+0.1% expected, +0.2% previously); Core PCE inflation, year-over-over, May (+2.6% expected, +2.8% previously); Personal income, May (+0.4% expected, +0.3% previously); Personal spending, May (+0.3% expected, +0.2% previously); University of Michigan consumer sentiment, June (65.8 expected, 65.6 previously)

Earnings: No notable earnings scheduled for release.

Correction: An earlier version of this story referred to Jonathan Golub, not John Stoltzfus, as chief market strategist at Oppenheimer Asset Management. Golub is a strategist at UBS.