The stock market bounced back Wednesday morning after two brutal days of sell-offs. The market rebounded strongly throughout July, posting its best month since early 2020. This rally came despite constant pressure on the economy in the form of both Federal Reserve rate hikes and ongoing shipping constraints in the global economy. Moreover, consumer sentiment is at an all-time low, and spending is down amid unprecedented inflation.
None of this seems to be bothering investors this morning, though. The Dow Jones Industrial Average spiked by 0.46% after the start of trading. The benchmark S&P 500, likewise, increased by 0.55%. Rising tech stocks and increased risk-taking in the high-growth sector have bumped the Nasdaq Composite up an impressive 0.85%. Why are investors so cavalier about the current state of the economy, even as the Fed signals its intention to implement more interest rate increases?
“Despite the fact most of today’s attention is still riveted on the Federal Reserve and its ongoing fight to bring inflation under control, many economic policies have already embarked on a new easing cycle,” speculates Jim Paulsen of The Leuthold Group. “The prospect of lower inflation is not only helping to usher in a new easing cycle but is apt to stoke a private-sector confidence revival that has untapped potential.”
Federal Reserve Unlikely to Stop Now
While some investors are already pricing in a world with lower inflation rates and a more laissez-faire Federal Reserve, the reality doesn’t seem to reflect that. In fact, James Bullard, the president of the St. Louis branch of the central bank, says that more interest rate hikes are on the horizon. “I think we’ll probably have to be higher for longer in order to get the evidence that we need to see that inflation is actually turning around on all dimensions and in a convincing way coming lower, not just a tick lower here and there,” Bullard said during a recent interview.
Bullard also noted that the rate hikes need to stay in place to get inflation under control. Despite numerous increases in borrowing costs this year, inflation remains stubbornly high. Ironically, this is due partly to the market’s seeming insistence on rebounding–like it’s doing right now. Positive stock movement keeps demand high, and high demand is fuel for inflation.
“We’re going to have to see convincing evidence across the board, headline and other measures of core inflation, all coming down convincingly before we’ll be able to feel like we’re doing our job,” Bullard went on. This could be bad news for investors–a slowed economy with less demand might be the only way to get the Fed to relent.
Yum Brands Misses Estimates
Elsewhere in the market, multinational food company Yum Brands missed its earnings estimate in the second quarter. Yum owns KFC, Pizza Hut, and Taco Bell, and operates thousands of restaurants around the world. However, the company says it mainly missed its earnings estimate because it pulled its operations out of Russia as a way to protest the country’s invasion of Ukraine.
Notably, the company only barely missed its estimates: it earned $1.64 billion, while consensus economists predicted they’d rake in $1.65 billion. Yum Brands also noted that part of its earnings missed was related to store shutdowns in China throughout the year. China faced another public health scare throughout the middle of 2022, leading to many locations temporarily closing their doors.
Encouragingly, Taco Bell sales were up throughout the year. The store chain sold 8% more in the US and an eye-opening 31% globally. This mixed news led to Yum Brands’ stock staying flat into Wednesday morning, with investors unsure of how to view the company in light of their misfortunes causing the shortfall.
AMD and Intel Warn that PC Market Is Collapsing
The price of graphics cards and processors surged throughout 2020 with sky-high demand meeting bottlenecked supply. This continued pattern has burned out many PC gaming enthusiasts and slowed the PC parts industry to a crawl in recent months. “We have taken a more conservative outlook on the PC business,” says Dr. Lisa Su, the CEO of AMD.
“So a quarter ago, we would have thought that the PC business would be down, let’s call it high-single digits [percentage]. And our current view of the PC business is that it will be down, let’s call it mid-teens [percentage],” Su told investors on a recent earnings call. AMD’s stock dropped 2% on Wednesday in response to these statements.
AMD has updated its predictions for the third quarter, and now assumes it will earn between $6.5 billion to $6.9 billion. Consensus economists predicted the company would take in $6.8 billion, which AMD could miss by a wide margin if its assumptions are correct. As the pressure in the PC market could linger well into next year, AMD’s stock price is one to watch.