Stick with me here as I dive into a hypothetical (I promise there’s a point ...)

Last month at the Paris Olympics, U.S. swimmer Katie Ledecky won the 800-meter freestyle in a time of 8:11.04, beating Ariarne Titmus of Australia by 1.25 seconds. Coincidentally, that’s almost exactly the same margin by which Ledecky beat second-place Titmus four years earlier at 2020’s Tokyo Olympics (when Ledecky finished in 8:12.57 versus Titmus’s 8:13.83, for a winning margin of 1.26 seconds.1 Now imagine if at this year’s medal ceremony, the Olympic Committee halted the playing of “The Star-Spangled Banner” with a scratch, tossed on “Advance Australia Fair,” and instead awarded Titmus the gold. The rationale? Sure, Ledecky beat Titmus again this year, but she didn’t beat her by a wide-enough margin to impress the judges. The Olympic Committee awards the gold medal to second-place Titmus and the silver medal to Ledecky. Everyone goes home happy.

I imagine that must be pretty much how Nvidia’s executives felt after beating earnings last week.

At first read, Nvidia did everything right: They beat on the topline, they beat on the bottom line, they beat on margins, they upped guidance, and they announced a share buyback.² (A share buyback is often bullish for a stock because it reduces the number of shares in circulation and therefore increases future earnings per share by reducing the ratio’s denominator.) But the stock sold off anyway, losing almost 8% on the week (and touching $115 per share at one point during Thursday’s after-hours session, a level that would have implied an even deeper loss on the week).

Pundits were quick to point to a slight disappointment with the production schedule for the company’s hottest new artificial intelligence (AI) chipset design to explain the drop, but I suspect the real reason had at least as much to do with the fact that the company failed to produce the kind of blowout beat-and-raise that some investors imagined they needed to sufficiently feed the AI hypebeast.

If that’s what was really at work, it’s a good lesson for anyone who might be tempted to hop on an investment super-trend mid or late stream: Even if things shape up pretty much the way your most optimistic case suggests they could, you can still get pinched when elevated expectations fail to materialize (especially when valuations get a little stretched). Said a little differently, when things start to look frothy, buyer beware.

Nvidia’s decline was tough if you happened to be long on the stock, but there were other, more optimistic things going on in the background. For starters, Nvidia’s drop post-earnings didn’t really tank the market as a whole, even though it represents a very big chunk of headline indexes like the Nasdaq Composite and the Standard & Poor’s (S&P) 500® Index. Sectors like financials, industrials, and materials patched up the hole that Nvidia and other tech stocks might otherwise have blown in the side of the market, and smaller stocks once again almost kept pace with larger ones. So while Nvidia’s win may not have been quite good enough for gold, it occurred alongside a further broadening out from tech and the “Magnificent Seven” that can only be seen as healthy. (It’s worth mentioning, however, that as I write this on Tuesday morning, equity markets are suffering a bit of indigestion.)

Whew, okay. What else can earnings tell us about the macro environment? Quite a bit, actually. We’ve been writing for quite a while about how macro data is sending unusually mixed signals about the state of the U.S. economy right now. Can a still-expanding services sector continue to pick up the slack for renewed contraction in manufacturing? Is employment actually weaker than headline payrolls numbers might suggest? How is consumer spending still so robust? (A still-spendy consumer was enough to elevate last week’s revision of second-quarter gross domestic product [GDP]³ another 0.2% to 3.0%. So, yeah …)

These are some of the debates that macro data hasn’t been very helpful in resolving of late. And that stands to reason: Most macroeconomic data operates with a lag and is quite often stale by the time it sees the light of day. That’s particularly true when the economy is inching toward an inflection point, as it seems to be today. So to capture a better read on what the future might hold, it’s often better to consult the entities responsible for all that growth and contraction in the first place: The companies themselves.

Thankfully, there are still a few companies reporting earnings to serve as a guide in all this murk. Beyond Nvidia, we also received results from Dell (who surged on the realization that they, too, might actually benefit from all this AI stuff) as well as a whole batch of retailers. While it’s tough to characterize who won last week’s earnings derby and who lost, it seems to me one theme that emerged from the basket of retailer earnings we got last week was that consumer demand is flat at best, and a certain segment of the consuming public is really struggling: Deep discounter Dollar General was probably second only to Nvidia on the list of noisiest earnings releases last week, and they got clobbered after admitting that their target demographic is pulling back because working-class consumers are becoming “financially constrained.” And under the heading of “I wouldn’t normally go here, but today it kinda makes sense ... ,” consider that two boat manufacturers — Malibu Boats and MasterCraft — were singled out for cutting guidance massively amid a slowdown in demand. And unless you’re country music star Chris Janson (“Buy Me A Boat”), it’s hard to imagine a more discretionary spend than a new boat.

That said, last week’s retail earnings on the whole showed that you can still do just fine if you’re able to rationalize your cost structure and defend (or even build) your profit margins — as multiple other retailers showed us last week with their results. And maybe that’s the whole point: As demand slows and the post-pandemic splurge comes to an end, the companies that thrive are the ones who successfully tighten their belts just enough to survive but not so much that they fold in on top of themselves. And that seems about as good a description of the current macro environment as you’re likely to find anywhere.

In the meantime, though, the macro data keeps flowing. Friday’s income and outlays report was mostly a non-event, with both income and spending coming in more or less exactly as expected.⁴ The Personal Consumption Expenditures Price Index (PCE) inflation — the Federal Reserve’s preferred measure — was also closely aligned with expectations and did nothing to change the consensus view that the Fed finally has the confidence it needs to begin cutting rates later this month. The one (slightly) negative surprise was a dip in the savings rate to 2.9%, which could signal increasing stress on the U.S. consumer.  Speaking of whom, last week’s twin consumer confidence surveys were also mostly benign, although there was a modest worsening of consumers’ perceptions of the jobs market if you’re willing to squint hard enough to see it.⁵

Finally, the productive side of the economy continues to weaken. Regional manufacturing surveys by both the Dallas Fed⁶ and the Richmond Fed⁷ continued to languish deep in negative territory (although the Dallas Fed’s read was a little less bad than expected), and the Chicago/Market News International Purchasing Managers’ Index (PMI) remained in contractionary territory for the ninth consecutive month.⁸ And while Monday’s durable goods orders release looked extremely strong on a headline basis, it was far more upbeat for companies that build airplanes and missiles than it was for those who don’t.⁹

So to recap, it’s still possible to find evidence in the macro data to support whatever viewpoint you choose to hold. It’s also possible to read a lot into the earnings reports that continue to trickle in, and once again the data you choose to focus on will likely be tainted by the bias you bring to the discussion. But from my perspective the takeaway is this: The U.S. economy is still winning the race against recession for now, but the margin of victory is narrowing.

What to watch this week

It’s payrolls week again, with Friday’s employment situation summary standing out as the single most important thing on this week’s calendar. As we’ve written multiple times, it’s hard to imagine any piece of macroeconomic data being more important to the overall narrative than the health of the labor market: It’s suddenly top of mind for the Fed, it’s a central point of leverage for companies hoping to defend profit margins in the event of a deeper pullback in demand, and it’s always a crucial input into consumer sentiment. That makes Friday’s release of payroll growth and the national unemployment rate one of the most important macroeconomic releases so far this year.

As always, the run-up to Friday’s release will be important, too. The fun begins on Wednesday with the Job Openings and Labor Turnover Summary (JOLTS) and its marquee figures: Net job openings (indicating how willing companies are to expand their payrolls) and the “quits rate” (indicating how willing workers are to leave said payrolls, a key metric of confidence in the labor market). But for my money I’d pay at least as much attention to Thursday’s Challenger layoffs report, which collects data on employers’ explicit hiring plans. Recently, that figure has been somewhat at odds with a still-elevated JOLTS, presenting economists hoping to understand exactly how strong the U.S. jobs market is (or isn’t) with something of a mystery.

A second economic mystery remains whether or not the services sector is still capable of bailing out a contraction in the goods-producing sector. We’ll get more evidence to help solve this “whodunit” this week when the Institute for Supply Management and S&P Global Inc. each release their latest PMI report. While the manufacturing version of these reports is due on Wednesday, the services version is expected on Thursday.

On the earnings front, we’ll get an opportunity to test whether last week’s downbeat guide from Dollar General was an indication of general consumer distress or something more company specific (like a loss of market share to rivals like Dollar Tree, who will report its quarterly results on Wednesday). Similarly, look for Dick’s Sporting Goods — which sells small boats in addition to lots of other discretionary goods — to either confirm or refute whether last week’s boating accident in the form of deeply revised earnings guidance from two big boat manufacturers was real.

Finally, look to Wednesday’s Beige Book from the Federal Reserve for a more granular read on the economy on a region-by-region basis. Recent editions of the Beige Book have been fairly closely aligned, differing mostly on which version of the word “meh” best describes the 13 local economies that make up the Fed’s domain. If this week’s version shows more dispersion — or chooses a different word to describe growth — it could help clarify things at the national level.