Markets Mixed As Fed’s Tone Shifts

As expected, the Federal Reserve followed through with its eleventh rate hike of the cycle, raising rates by 25 bps to a target range of 5.25%-5.50%. That’s the highest level in over 22 years, and Powell has left the door open for at least one more. ☝️

In its last update, the Fed said policymakers expect two more rate hikes this year, but the markets have been anticipating just one more hike this year. Today, Chairman Jerome Powell said that inflation has moderated, but there’s still a long way to go before hitting the 2% target.

More specifically, he said, “I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady and we’re going to be making careful assessments, as I said, meeting by meeting.” 🔬

Given the mixed environment where inflation remains elevated, and the labor market is historically tight, the Fed doesn’t want to commit in either direction. Since the data is mixed, investors will be closely watching it until the Fed’s next meeting in September.

Currently, the bond market is pricing in about an 80% chance of keeping rates where they are and a 20% chance of raising another 25 bps. Overall, the market believes the Fed is behind the curve on inflation again and will not need to hike again by the end of the year. The majority of the Fed’s officials seem to think otherwise. 🤔

In the meantime, stocks continue to price in a “soft landing” where the economy continues to grow at a moderate pace and inflation comes down over time. We recently talked about the large-cap industrial sector ETF $XLI hitting new all-time highs. 📈

Well, the breakouts continued today, with Boeing and Union Pacific gapping higher following earnings. Bulls are taking to the rails and the skies to express their bullish thesis. They certainly wouldn’t be doing so if they believed the economy was going to collapse. 

Overall, optimism continues to reign supreme despite the Fed’s best efforts to calm the markets and economy down. Until a big enough risk comes along to throw the bulls off track, the party looks like it will continue. Who’s next for limbo??? 🤷

Meta shares are making new recovery highs after reporting better-than-expected results. CNBC has a breakdown: 👇

Investors are celebrating the first quarter of double-digit YoY revenue growth since the end of 2021. Its 11% growth is a stark turnaround from the three periods of revenue declines experienced last year. And looking ahead, the company expects revenues of $32 to $34.5 billion in the third quarter. The low end of that range represents 15% YoY growth. 💪

CEO Mark Zuckerberg touted the company’s exciting product pipeline, including Llama 2, Threads, Reels, Quest 3, and new AI products.

But big investments don’t come without a cost. Expenses rose 10% YoY to $22.61 billion. While the company has aggressively cut costs during its “year of efficiency,” headcount costs remain elevated. Total headcount fell 14% YoY, but only half of the 2023 layoffs are reflected in that number. And payroll expenses are expected to remain elevated as its workforce shifts toward higher-cost technical roles. 🤑

As for its Reality Labs unit, sales of $276 million paled in comparison to its $3.7 billion loss. Much of the company’s 2023 capital expenditures of $27 to $30 billion come from this unit, which is expected to remain a cost center through 2024 as Meta makes its vision a “reality.”

Investors are happy to see the digital advertising environment rebound more than anticipated. Clearly, Meta is positioned well to take advantage of this shift, with $META shares up another 6% after hours. Eventually, the “straight-line” ascent that began last October will end. But today was not that day. 📈

Chipotle investors feel like they’ve received a bowl of guac without the chips to eat it with. That’s because its quarterly earnings beat expectations, but sales missed. That starkly contrasts the stock’s post-earnings gap that sent shares to all-time highs in May. 😬

Today the fast-casual restaurant chain reported $12.65 in adjusted earnings per share on $2.51 billion in revenues. Analysts had expected $12.31 and $2.53 billion in revenues. With that said, same-store sales of 7.4% were 0.1 percentage points shy of expectations. 🔻

As for restaurant-level operating margins rose from 25.2% one year ago to 27.5%. Lower avocado prices helped, but the company is still experiencing higher prices for other key ingredients. The company also said last quarter that it’s done raising prices, so margin expansion must come from cost reduction. 🔺

However, CEO Brian Niccol walked back those comments today, saying, “As we get closer to the fourth quarter, we’ll make a decision exactly on what we want to do on the pricing front.”

Executives say they’re focused on improving restaurant efficiency through training and equipment upgrades. Its goal is to serve more customers during peak times. Meanwhile, digital sales continue growing, accounting for 38% of the company’s food and beverage revenue. 📲

Looking ahead, Chipotle reiterated its full-year forecast for same-store sales growth in the mid-to-high-single-digit range. It does expect low-to-mid-single digits in the third quarter, though.

Expectations were high, with prices trading just below all-time highs ahead of the release. Unfortunately for investors, the revenue and same-store sales miss was enough to cause a selloff. $CMG shares are currently down 9% to three-month lows. 👎