How Earnings, Inflation and Strikes Could Move Markets

This month, markets will weigh biotech and semiconductor earnings, news from several major labor disputes and economic data that could shed light on the chances of an upcoming recession.

Must-read: What summer strikes could mean for your shares

Hollywood’s writers and actors are on strike, freezing production at media companies like Netflix (NFLX).

Negotiations between the United Parcel Service (UPS) and the International Brotherhood of Teamsters came down to the wire last week over issues of wages and working conditions.

And pilots for Southwest Airlines (LUV) have voted to authorize a strike that could start as soon as this month.

What do workers want?

Daniel McKeever, a professor of management at Binghamton University in New York, says the writers and actors unions have two main grievances. One is an inadequate share of streaming revenue, and the other is the threat of replacement by artificial intelligence (AI).

He says the Southwest Airlines Pilots Association (SWAPA) is considering striking over excessively long days, short rest periods, a lack of cost-of-living raises and unreliable IT systems that often lead to unnecessary flight delays and cancellations.

What does this mean for share prices?

McKeever says that the stock market will likely reward companies that break strikes in the short term — by waiting out their workers or bringing in nonunion replacements. But the question of whether that’s a sustainable strategy is more complicated.

Concerning media companies, a prolonged strike could turn off viewers — as it historically did during lockouts in major-league sports.

“If you’re relying on replacement labor … does your product suffer? And if so, will you see that downstream in terms of lower revenues, lower demand and eventually lower stock prices?” McKeever says.

He says Southwest could face a similar tradeoff if it tries to break the SWAPA strike. That might make shareholders happy in the short term, but it could degrade Southwest’s product in the long term — with potentially serious consequences. “Until a catastrophe happens as a result of all that [pilot schedule] optimizing, shareholders love it,” he says.

» Read more about stock analysis.

Term of the month: soft landing

When a pilot lands an airplane, they have to drop altitude, quickly and gently enough to ensure a smooth touchdown. The Federal Reserve is facing a similar challenge as it attempts to pilot the economy into a soft landing.

Soft landing definition

In economics, a soft landing refers to a central bank like the Fed raising interest rates fast enough to curtail excessive inflation but slow enough to avoid crashing the economy and potentially causing a recession.

The Fed has raised its federal funds rate target 11 times in the last 18 months to tame rapid price increases; most recently, it raised its target to between 5.25% and 5.5% on July 26.

The effort has largely been a success so far. The consumer price index (CPI) increased just 3% year over year in June 2023 — a big improvement over the 9.1% annual increase recorded in June 2022. During that one-year period, the unemployment rate has stayed below 4%, and gross domestic product (GDP) growth has remained positive.

Are we headed for a soft landing? August CPI data may have answers

Now, investors are awaiting August economic data to see if the economy is still on track for a soft landing.

Johann Lee is the director of research at AlphaCore Wealth Advisory, a California-based registered investment advisor. He said in an email interview that markets are expecting moderate CPI growth. The 10-year breakeven inflation rate, one measure of the market's inflation expectations, was around 2.2% at the time of publication.

Lee said higher inflation could roil stocks and bonds. “A hotter-than-consensus CPI report would potentially suggest higher bond yields, thus a selloff in bond markets,” he said, adding that it “could put pressure on equities as discount rates move higher.”

Conversely, Lee said lower-than-expected CPI growth could also push down stocks if “investors digest the news as demand rapidly falling.”

In other words, the August CPI report could be an important indicator of whether or not a soft landing is in the cards. If the CPI is too high, interest rates may need to go higher to tame inflation. If it’s too low, that could mean there’s a recession coming.

We’ll find out on Aug. 10.

» Learn about some relatively recession-proof stocks.

Dates that could move markets this month

Economic data

• The Bureau of Labor Statistics (BLS) will release its monthly employment situation summary Friday, Aug. 4.

• The BLS will also release its monthly CPI report Thursday, Aug. 10.

• The Bureau of Economic Analysis will release its second estimate of U.S. GDP for Q2 Wednesday, Aug. 30.

Earnings

Some of the biggest biotech stocks will report earnings in August.

• Eli Lilly and Co. (LLY) will report Aug. 8.

• Medtronic (MDT) will report Aug. 22.

August is also a big earnings month for the semiconductor industry, which plays a major role in AI development.

• Applied Materials (AMAT) will report Aug. 17.

• Nvidia (NVDA) will report Aug. 23.

» Dive deeper into AI stocks.