This week, investors face an inflection point for the equity rally.

Several leading artificial intelligence (AI) companies such as Microsoft (NSDQ: MSFT), Facebook parent Meta Platforms (NSDQ: META), Apple (NSDQ: AAPL), and Amazon (NSDQ: AMZN) are scheduled to release their quarterly earnings throughout the week.

Although market breadth is increasing, the performance of these tech giants continues to disproportionately drive the stock market rally.

Meanwhile, the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) is slated to announce its interest rate decision on Wednesday.

After experiencing a nearly 5% decline in mid-July, the S&P 500 appears to be stabilizing, with market leadership broadening.

Year to date, the S&P 500 has risen over 14%, compared to an 11.5% increase for the Russell 2000 index. However, so far in July alone, the Russell 2000 small-cap index has surged by approximately 10%, while the broader S&P 500 has remained relatively flat. This trend of expanding market leadership is expected to continue, emphasizing the importance of diversification in your portfolio.

All eyes are on this week’s two-day FOMC meeting, concluding on Wednesday with an interest rate decision and a press conference by Fed Chair Jerome Powell. When Powell speaks, the market’s reaction is usually apparent in real time. When you see him walk up to the lectern, stay alert. His words and tone carry a lot of clout.

Wall Street expects the Fed to maintain the federal funds rate at 5.25% – 5.50% this week, but Powell in his remarks probably will signal rate cuts for the latter part of the year. He can point to significant progress in curbing inflation.

The latest data shows that inflation in the U.S. has moderated, with both the consumer price index (CPI) and the personal consumption expenditures index (PCE) trending lower in recent months. The latter is the Fed’s preferred inflation gauge.

In addition, the labor market has shown signs of softening, with the U.S. unemployment rate rising to 4.1%, slightly above the Fed’s forecast of 4.0% for the year, and wage gains moderating to below 4.0%. This combination of easing inflation, a Fed inclined to reduce interest rates, and positive but cooling economic growth supports the ongoing stock market expansion.

The week concludes with the release of the U.S. July nonfarm jobs report on Friday morning. Expectations are for an increase of 175,000 jobs, lower than last month’s 206,000 and the average of 222,000 new jobs per month this year. The unemployment rate is expected to hold steady at 4.1%, while average hourly earnings are projected to decrease from 3.9% year-over-year to 3.7%.

The Fed will closely monitor this wage-growth data, because softer wage gains typically suggest lower services inflation. The labor market appears to be cooling without collapsing, supporting the “soft landing” narrative for the U.S. economy.

Profit margins stay strong…

Lingering worries about inflation beg the question: How are corporate profit margins holding up? The answer is, quite nicely.

According to FactSet, the blended net profit margin for the S&P 500 for Q2 2024 is 12.1%, which is above with the year-ago net profit margin (11.6%), above the five-year average net profit margin (11.5%), and above the previous quarter’s net profit margin (11.8%). “Blended” combines actual results (as of this writing) with projected ones (see chart):

Indeed, this quarter marks just the second time that the S&P 500 is reporting a net profit margin above 12% since Q2 2022. Corporations have been coping with inflation by implementing price hikes and internal efficiencies. Consequently, when inflation is finally vanquished down the road, earnings are poised for an extra upward jolt.

On Tuesday, the main U.S. stock market indices closed mixed as follows:

• DJIA: +0.50%
• S&P 500: -0.50%
• NASDAQ: -1.28%
• Russell 2000: +0.35%

Microsoft announced its fiscal fourth-quarter operating results after the closing bell Tuesday, beating on the top and bottom lines. However, the company missed on cloud revenue expectations.

Shares of MSFT fell more than 7% in after-market trading, as investors started to worry that perhaps the market’s AI mania had gone too far.

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