No Data

Answer: With major economic data being delayed, we rely more heavily on corporate earnings and company disclosures. Earnings calls and management commentary will be important sources for insight into current conditions and future expectations. There are five themes we’ll be monitoring closely for clues as to where the economy and markets may be headed.

Consumers

The softer job market and tariff pressures have created some concern about consumer resilience. We’re watching trends in consumer spending on essential and non-essential items. Examples of consumer staples are food, beverages, and household goods, while discretionary items include jewelry, electronics, automobiles, apparel and accessories, entertainment, and luxury goods. We expect tariffs and slower hiring to put pressure on spending, especially for lower-income households, leading to caution on consumer-focused sectors.

Tech Leading the Pack

Technology has dominated earnings reports in recent quarters. Third-quarter results will be key to gauging the health of AI (artificial intelligence) and technology investment. The AI supply chain remains strong with healthy guidance from software firms and data centers, which will be important for spotting trends in the future. It’s expected that the tech sector will continue to beat other sectors each quarter, going through 2026 with shareholder-friendly actions such as increased dividends and buyback, indicating an overweight to the tech-sector.

The products of technology companies may be subject to severe competition and rapid obsolescence, and their stocks may be subject to greater price fluctuations.

Earnings High Bar?

Over the past 12 weeks, earnings estimates have ticked up 0.4%, compared to an average 3.2% cut over the last ten years. Investors will likely focus more on revenue growth than cost-cutting measures like layoffs. Companies that fall short of expectations will likely be punished more severely than usual, coming off a quarter of double-digit earnings growth. The “Magnificent Seven” or MAGMAN (Microsoft, Apple, Google, Meta, Amazon, and Nvidia) are expected to drive much of the growth. The foregoing is not a recommendation to buy or sell MAGMAN stocks.

Tariff Impact

Country level tariffs took effect on August 7th, meaning that third-quarter results may only show a partial impact on these changes. The results will undoubtedly vary by company and sector. The full effect may not be felt until the fourth quarter or even into early 2026, depending on supply changes. Sectors with strong pricing power, like technology and health care, will most likely be able to pass costs along to consumers.

In contrast, sectors like materials, which include chemicals, plastics, cement, concrete, containers, and paper, along with consumer staples, which are items such as food and beverages, household products, and personal care items, likely have less flexibility and are not as likely to pass costs along to consumers. This will cause further pressure on their profit margins. Even if tariffs don’t show up in this quarter’s numbers or earnings guidance, expect conference calls to focus on how firms plan to respond, whether through price hikes or sourcing changes.

Small, Medium, or Large

Small cap stocks are companies typically ranging in size from $250 million to $2 billion in size. They’re often newer, focused on growth and may show greater volatility and risk as compared to their mid and large cap counterparts. Examples are often found in newer, more innovative companies and sectors such as consumer goods, technology, and healthcare.

Mid cap stocks are defined as having market capitalization between $2 billion and $10 billion. Market cap is calculated by multiplying the company's stock price by its total number of outstanding shares. These companies have a balance between growth and stability, providing a middle ground between small and large companies.

Large cap companies are those with market capitalization greater than $10 billion. They’re well-established and stable household names and considered to be less volatile than small or mid cap names. The tradeoff is potentially lower growth rates, with the recent exception of the Magnificent 7 MAGMAN names that have benefited from AI technology gains.

Since the market bottom last April when tariffs were announced, small caps have surprisingly been outperforming large caps. Their earnings tell a different story, though. Small cap earnings are still 7% below their 2021 high, while large-cap earnings are up 22% over the same time period. Expectations are for small cap earnings to rise approximately 7%. The risks are exposure to regional banks and unprofitable tech names. Meanwhile, fundamentals remain strong for large caps, highlighting the importance of diversification and analysis of the quality of individual names.

The Fed

Comments by Federal Reserve officials indicate lower interest rates. Their job is to support growth and labor. We expect two more rate cuts this year and at least one early next year. Financial markets are pricing in five rate cuts by the end of 2026.

To paraphrase Einstein’s quote, any overgeneralization based on data alone is dangerous. Oversimplification may lead to overlooking the big picture and specific nuances. Stay focused and plan accordingly.