Market backdrop
Equity markets are holding up well even with geopolitical risk in the headlines. Earnings are winding down and have beaten estimates on year-over-year growth, which lends support. The Russell 2000 small-cap index set a record closing high yesterday, and the S&P 500 equal-weight index closed at a record. The S&P 500 itself sits just below its record high.
Crude oil fell about 2% today, which helps stocks. The drop does not come from easing tension: the Strait of Hormuz is still closed and talks are not non-existent. Oil is pulling back on supply data. EIA figures yesterday showed an inventory build of over 17 million barrels, the highest since January 2023. The IEA also reported an expected 1.6 million barrel drop in demand. Weaker oil is a positive for equities.
Tech is leading higher even with Cisco and Cerebras falling this morning. Dell and HP Enterprise posted big gains. Cybersecurity names CrowdStrike and Palo Alto, which hit record highs this week, are doing well, and Akamai rose after an upgrade. The NASDAQ 100 is about 3% off its all-time high.
Inflation check
CPI came in yesterday in line with expectations: 3.4% year-over-year on the headline and 2.5% on core. Both remain above the Fed's 2% target, but a cooling trend is forming.
For the producer price index, which tracks wholesale prices, the month-over-month numbers may be pushed aside; core (excluding food and energy) is expected up 0.3%. Investors will focus on the year-over-year figures. Headline PPI is expected at 4.9%, still high but down from 5.5% in June. In May the headline ran at 6% before falling to 5.5%. A year-over-year reading below 5%, at 4.9%, would be a positive for markets. Core year-over-year is expected to fall to about 4.2% from 4.7%.
If inflation keeps trending lower, it eases the burden on the Fed. Odds of a September rate hike have come down over the past week or two, sitting at about 36% on the CME FedWatch tool as of yesterday's close. Markets need year-over-year headline numbers to keep falling.
Cisco
Cisco beat on earnings per share and revenue and raised guidance. It was a solid report, but the bar was high after a parabolic run in the first six months of the year, so the results roughly matched whisper numbers. The main concern is a drop in gross margins: total gross margin was 66.3% for the quarter, down from 68.4% a year ago.
The networking segment, which includes gear used in AI data centers, grew as enterprise demand for AI infrastructure rose. Networking revenue came in at $9.79 billion, above the roughly $9.65 billion expected. Cisco took $5.3 billion in AI infrastructure orders from hyperscalers so far this year, and its reported order figure of $9.3 billion is already ahead of estimates. Guidance keeps rising as AI buildout spending stays strong.
The stock's losses are modest, likely some profit-taking. Cisco could end flat or even higher by the close if the broader market stays positive.
Cerebras
Cerebras was the biggest IPO this year before SpaceX. Its shares are tumbling in the pre-market, down 17-18%. Cerebras competes directly with Nvidia but does not make GPUs; it makes large wafers, shaped like big dinner plates, that hold more context.
Revenue came in at $180 million versus over $190 million expected, a miss. The company raised its full-year outlook and now expects core revenue between $880 million and $890 million, up from the prior $855 million to $865 million range. On current sales it is not a growing business, so investors should focus on future orders. This is a growth story, and the problem is that Cerebras has not booked many of the orders it already holds and has to ramp production, which has been a sore spot. That backlog shows up in its remaining performance obligations, which are building. To challenge Nvidia, which keeps forming partnerships, Cerebras needs to expand its own partnerships, manufacturing, and production, and get output up to speed.
