Market setup
A semiconductor-driven session opened with early weakness. The macro backdrop pointed lower: the dollar, bond yields, and crude oil all rose. Dow futures held up better than the rest because United Healthcare traded higher pre-market. The S&P 500 sat just 40 to 50 points below its all-time high after two big up days, so a soft start followed a strong run. Earnings season turns a big market into many small stories, and several played out at once. Stocks now trade in blocks by sector. Taiwan Semi fell and pulled Broadcom and Nvidia down with it pre-market. The same pattern shows up in airlines and banks. The main worry is the lack of breadth, with the whole market leaning on a handful of semiconductor and memory chip makers.
Retail sales and the consumer
Headline retail sales rose 0.2% month over month, a slight miss versus expectations. Sales excluding vehicles fell 0.2%, worse than the 0.1% drop that had been expected. Sales excluding vehicles and gas beat, up 0.4%. Last month's already strong figures were all revised higher: the headline number went from 0.9% to 1%, excluding vehicles from 0.8% to 1%, and excluding vehicles and gas from 0.5% to 0.8%. Some softness in the headline, but the beat in the core measure and the upward revisions meant the report did not hurt the market.
The US consumer drives about 70% of the economy and is still spending despite headwinds. Bank of America CEO Brian Moynihan said the consumer remains strong.
Jobless claims and the labor market
First-time filers for unemployment insurance came in at 228,000, a historically strong number. Any down day would not come from the data. Claims had surged back in May and stayed elevated through at least mid-June, then retreated. The market has been called "slow hire, slow fire," and the labor market may be coming out of that hibernation. Payroll data delivered a couple of strong monthly beats before a softer but still solid latest month. The unemployment rate stands at 4.2% with steady non-farm payrolls. The labor market is not a problem, and jobless claims confirm it. An employed consumer who keeps showing up and spending is a core strength of the economy. Both consumer resilience and a resilient labor market get discounted too easily.
Taiwan Semiconductor (TSMC)
The numbers were strong across the board, hard to fault, yet the stock fell about $17 to $18 pre-market. When the bar is set very high, it takes little to shake confidence. The one soft spot: gross margins face temporary downward pressure, guided at 65% to 67%, driven by ramp-up costs for the new two-nanometer technology. That margin worry pulled the stock off its highs even though every other figure was a strong percentage gain. ASML showed the same dynamic recently: very strong numbers and a strong initial reaction, then it gave back nearly all the gains by the session's end.
GE Aerospace
Down about $10 pre-market after an incredible run, off roughly 6% from its recent highs, but the report was strong and the company is set up well. It raised its outlook despite delivery delays. In a duopoly of Boeing and Airbus, GE Aerospace is the exclusive jet engine provider for the entire 737 Max program and competes with Pratt & Whitney on the Airbus A320 program. Pratt & Whitney has had quality problems, leaving GE Aerospace dominant. Revenue rose 36% year over year to $40.2 billion. The company carries a large backlog, and about two-thirds to three-quarters of its revenue comes from servicing and parts: once it sells an engine, it services that engine for years.
Aerospace and defense read-through
The street seems unsure what to do with aerospace-exposed names. Normally, during geopolitical stress, defense names do well, but that has not held this time. The mix of Middle East uncertainty, higher fuel costs, and a government spending differently than before has muddied the picture. Boeing is the clearest example, still struggling even as it raises production and works out of years of problems. Boeing is now roughly unchanged year to date, while GE Aerospace has gained well and held closer to its highs. Since GE Aerospace supplies engines to both Boeing and Airbus, a Boeing recovery may be what these stocks need to climb again. Even so, GE Aerospace is well positioned for the future.
