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The market is split on the Fed cutting by a quarter or half point. (0:18) FedEx is the big earnings report this week. (3:22) Disney and DirecTV agree a deal to end blackout. (4:30)
The following is an abridged transcript:
It’s Fed week and by Wednesday afternoon the benchmark federal funds rate will be lower. The question is by how much.
The FOMC starts its two-day meeting on Tuesday with members expected to start loosening monetary policy as the focus turns away from inflation and to a weakening labor market.
The pendulum has swung to jobs from price stability following the latest CPI numbers, with WisdomTree chief investment officer Jeremy Schwartz calling inflation “virtually a non-issue now.”
But as recently as Thursday morning traders were convinced that the Fed would start its rate-cutting cycle cautiously, taking the fed funds range down by 25 basis points to 5%-5.25%. That changed quickly Thursday afternoon, though, when Wall Street Journal reported Nick Timiraos – who has been dubbed the Fed Whisperer – reported that members, including Chairman Jay Powell, were still undecided on the size of the cut.
Odds of a quarter-point cut over a half point tumbled from 85%. It’s now a coin toss going into Fed week.
J.P. Morgan economist Michael Feroli says it’s clear the Fed should cut by 50 bps to “adjust for the shifting balance of risks. What the FOMC will do is less clear, but we’re sticking with our call that they will do the ‘right’ thing and cut 50bp.”
Goldman Sachs economist Jan Hatzius maintains the Fed will cut by 25 bps and expects 200 bps of easing through 1Q 2026, compared with market pricing of 260 bps.
Goldman equity strategist David Kostin says: “While some investors believe the speed of Fed cuts will be the key determinant of equity returns in coming months, the trajectory of growth is ultimately the most important driver for stocks.”
“For much of the past few years, when inflation was the primary driver of Fed policy, the correlation between equities and bond yields was negative. The market believed that ‘good news was bad news’ if strong economic growth added to inflationary pressures and required additional Fed tightening,” he said. “Recently, however, the correlation between equities and bond yields has flipped back to positive, indicating that ‘good news is good news.’ If the market prices less Fed easing because the economy proves resilient, equities will rise despite higher bond yields.”
We asked Seeking Alpha analysts whether the rate-cutting cycle will impact market seasonality.
Victor Dergunov says “I think the upcoming rate cut has already influenced the market’s seasonality. The forthcoming September rate cut is a bullish event for stocks, but the stock market was already overextended technically in July. Therefore, the market needed a pullback, and we had a textbook 10% correction in July/August.”
Chris Lau says investors should “assess Fed policy, seasonality and the election. Under those uncertain conditions, bonds and banks are the most attractive holdings.”
Jacob Hess of MTS Insights says “stocks tend to do well when the Fed eases into an expansion.”
“As long as macro data reflects a gradual easing in the labor market and continued economic growth, the S&P 500 has a good chance of being green in October.”
On the earnings calendar, Ferguson Enterprises (FERG) reports on Tuesday.
General Mills (GIS) and Steelcase (SCS) weigh in on Wednesday.
On Thursday, FedEx (FDX), Lennar (LEN), Darden Restaurants (DRI) and FactSet Research (FDS) issue results.
FedEx is expected to report EPS of $4.85, an operating income rate of 7.6%, and free cash flow of $1.14 billion. Key topics for the earnings conference call will include the guidance update, expectations for the compressed holiday season, and the implications of the end of the USPS contract. Options trading implies a 7% swing in share price after the report is released. FedEx soared more than 15% after its last earnings report.
In the news this weekend, German billionaire Mathias Doepfner and KKR are nearing a deal to split up media giant Axel Springer. That’s according to the FT.
The deal would give KKR majority control of the company’s profitable classifieds business. The deal would value the German publisher firm at €13.5 billion, including more than €10 billion for the classifieds business.
Also on the M&A front, Bloomberg says AT&T (T) and joint-venture partner TPG Capital (TPG) are in talks to merge their DirecTV service with EchoStar’s (SATS) Dish.
The deal would create the largest pay-TV provider in the U.S., but it’s not the first time the companies have tried to merge. The companies attempted to combine in 2022, but were blocked by the Justice Department.
And DirecTV and Disney (DIS) said they had reached a new agreement in principle that would restore channels such as ESPN and ABC to millions of subscribers, ending a roughly two-week blackout.
DirecTV subscribers on September 1 found themselves unable to access Disney channels after the two parties failed to renew their distribution agreement before an expiry date. Terms of the new proposed deal include DirecTV paying “market-based” rates to carry Disney’s channels.
Other core points agreed to include: “Disney’s direct-to-consumer streaming services (Disney+, Hulu, ESPN+) to be included in select DIRECTV packages under a wholesale agreement, and also to be made available on an a la carte basis” and the “rights to distribute Disney’s upcoming ESPN flagship direct-to-consumer service upon its launch at no additional cost to DIRECTV customers.”
For income investors, AIG (AIG) and Iron Mountain (IRM) go ex-dividend on Monday. AIG pays out on Sept. 30 and Iron Mountain pays out on Oct. 3.
Broadcom (AVGO) goes ex-dividend on Thursday with a Sept. 30 payout date.
Dick’s Sporting Goods (DKS) goes ex-dividend on Friday, paying out on Oct. 4.
Companies forecast to increase their quarterly dividend payouts include Microsoft (MSFT) to $0.83 from $0.75 and Starbucks (SBUX) to $0.61 from $0.57.
And in the Wall Street Research Corner, Barlcays analyst Trevor Young says interest income has been “an under-appreciated tailwind” to free cash flow in the last two years for many stocks. That might reverse in the new falling rate environment.
Focusing on internet stocks, Young says online travel names stand out due to their favorable working capital dynamics.
“Cash collections are typically stronger early in the year when end-consumers book travel, with payouts to suppliers later in the year, giving these companies substantial ‘float’ to invest, hence why interest income is so meaningful for them.”
But stocks with higher interest income as a percentage of free cash flow are more likely to see a drag on their free cash flow as rate cuts come in.
He listed the internet stocks with high interest income as a percentage of free cash flow.
The names at the top of the list are Snap (SNAP), with interest income at 484% of free cash flow, IAC (IAC) at 148%, Roblox (RBLX) at 114%, Chewy (CHWY) at 52% and Tripadvisor (TRIP) at 27%.
