The Real Reason Stocks Dropped After The Fed Decision | Kenny Polcari

Well, good morning. Yes, it's me, Kenny Polcari, your host of the party, coming to you live from a dreary, damp Cape Cod. Today is Thursday, July 30th, 2026, and here are the things you need to know to get your day started. Well, Kevin kept his promise, and he didn't promise anything. The Momo guys and the algos, well, they threw a fit at the sell button, at the sell button, at the sell button. The bond market, well, it's quietly doing the work. Yields rose, done, right? Microsoft, they crushed it and they got bought. Meta, well, they disappointed and guess what? They got sold. And there's lots of economic data today. Then we're gonna get Apple and Amazon after the bell. And what do we have for dinner tonight? We're gonna have the penne alla diavola. Think the devil and it's hot down there, right? Just like angry the way the markets were. So, okay, yesterday stocks hit the skids, right? As investors tried to reconcile the FOMC decision versus the message that Kevi delivered. By now you know that the Fed did nothing, right? They held rates steady even as the market was pricing in a 30% chance of a rate hike, pitting the algos and the Momo guys against the Fed. At 2 PM, we got the news— no change. And that didn't cause much of a reaction because stocks were already weak going into the announcement. The reaction came when Kevvy took to the podium at 2:30. It was then that they realized the new chair had no intention of telling anybody what comes next, right? He didn't give a roadmap, no promise, no September hint, nothing that said we're done, nothing that said we're hiking, just uncertainty. And it was that uncertainty that forced the algos and the momo crowd to reduce risk. And so guess what? They threw a temper tantrum and hit the sell button in what was a classic sell first, ask questions later type of reaction. Hoping to force, you know, Daddy the Fed into changing his mind. Well, it was comical really, because the majority of the committee, as well as the majority of investors, got exactly what they expected—no change, right? And if that wasn't enough, Warsh told us that 3 members—Hammett, Kashkari, and Logan—who all dissented, voting for a hike, saying that inflation is a problem, even as the other 9 of them did not. And that only amplified the anxiety in the markets, especially with the Momo guys, right? Now layer in oil ripping higher by 6.5% on fresh threats of an increasing— of increasing tensions in the Middle East, and you end up with an ugly, but in my opinion, uh, uh, unnecessary day, right? At the end of the day, here's what it looked like. The Dow gave up 1,150 points or 2.2%. The S&P gave up 112 points, 1.5%. The NASDAQ lost 433 points or 1.6%. Putting it firmly in correction territory, now down more than 10%. The Russell gave back 48 points. The Transports lost 427 points, or 2%. The Equal Weight S&P gave up 75 points, or 9/10, while the Mag 7 lost 448 points, or 1.4%. Now let me just say this again. The sell-off wasn't really about the hold. It was more about the fact that they didn't get what they wanted. They didn't get a Fed chair that rolled over just because one group, by the way, in the minority, demanded a change. Period. The end. Now, the bond market though, they didn't overreact, right? It just did what you would expect it to do. There was no drama. It sold off, sending yields higher. Now, the 10-year surged by 7 bps to end the day at 4.67%. The 30-year surged by 10 bps, ending the day at 5.2 bps, uh, 5.2%. And this morning, both are a bit higher from there at 4.69% to 5.23% respectively. Now think about what that means. Warsh didn't raise rates. He didn't even hint that he would. Yet borrowing costs across the economy moved higher anyway. Why? Because the bond market is doing the heavy lifting. Remember, the Fed doesn't determine what consumers and businesses actually pay to to borrow money. The bond market does. Mortgage rates, auto loans, corporate debt, commercial real estate financing are all tied more closely to Treasury yields than to the Fed funds rate. Now, case in point, the Fed has left rates unchanged for 5 straight months, right? 5 meetings. Yet financial conditions in this country have tightened anyway. The average 30-year mortgage rate has climbed from 5.9% in February to about 6.7% today. Commercial real estate financing borrowing costs have done the same thing, rising from roughly a 5.8 to 6.2% range to a 6.1 to 6.8% range for high-quality borrowers. Now think about that. Borrowing costs have risen across the economy even though the Fed hasn't done a thing, which raises an important question. If the market is already tightening financial conditions on its own, why should the Fed raise rates again? And here's the other point that the algos and the Momo guys are missing. If inflation is being driven primarily by higher oil prices caused by the conflict in the Middle East, then raising interest rates isn't going to pump one extra barrel of crude oil out of the ground, or will it reopen a single shipping lane in the strait. Raising rates will not resolve that problem. Monetary policy cannot fix a geopolitical shock. The real solution is going to come when the conflict ends and supply, uh, the supply concerns fade and oil prices begin to retreat. Now, if that happens, a significant source of today's inflation, uh, is going to naturally just ease, right? The Fed knows it, the bond market knows it. And guess what? Now you know it. So the question really is, when is it gonna happen? Well, when is the conflict gonna end? Well, that's the conundrum. And then came the other event. It was Microsoft and Meta, right? They both reported after the bell. And it was, as you'll hear many people say, the tale of two cities. Microsoft crushed it. They beat across the board. Revenue of $90 billion versus the expectation of $87.7 billion. Adjusted earnings per share of $4.74 versus the expected $4.25. Certainly helped by their investment in Anthropic. Cloud revenue of $59.3 billion. Intelligent cloud revenue of $39.3 billion. Both ahead of estimates. Azure growing at 43% against the 40% bar. Full year Azure revenue crossing $100 billion for the first time. The kicker, their CapEx came in at $41 billion. Yes, it was up 69% year over year, but it was below the $42.3 billion that analysts had expected. That combination is what took the stock higher in the post-market and again in the pre-market today. This morning, Microsoft is quoted up, uh, up $34 at $425. That's up about 8%, uh, and it's adding $90 billion in market value. I hope you backed up the truck when they took it down to $350 because we discussed that weeks ago. Meta, on the other hand, didn't, right? Their quarter was bad— wasn't bad, it just wasn't good enough for the market that's demanding proof that all this AI spending is actually going to pay off. Revenue rose by 28%. Advertising revenue remained healthy. That's great. But earnings missed expectations. Free cash flow plunged from about $8.6 billion to less than $1 billion as infrastructure spending— AI infrastructure spending accelerated. Operating expenses continued to climb and Markey raised his CapEx spending outlook. That's what spooked investors. The message from Wall Street is clear: Show us the money. That's where the comparison with Microsoft becomes so important. Microsoft showed investors that its AI investments are already translating into faster Azure growth and stronger profitability. Meta, on the other hand, is still asking investors to believe that the payoff is coming. And that's the defining theme of this earnings season. Companies can no longer just announce another $100 billion in AI cap spending and expect everyone to just buy it. Investors are demanding evidence, and rightly so. Now, Microsoft delivered that proof. Meta did not. Period. End of conversation. Now, today after the bell, we're going to hear from two more, Apple and Amazon, right? The last two members of the Mag Seven to report this week after, after what we heard from Microsoft and Meta. Investors are no longer satisfied with just the promise. They want proof that AI spending is translating into revenue, earnings, and cash flow. So sit tight because these two reports could determine what happens next. Now, before we get there though, there's so much to look at, right? Because we got, we're, we got a full slate of economic data that we have to digest today. Personal income and personal spending are both expected to moderate a bit from last month. That's good. June's PCE inflation report, the Fed's preferred inflation gauge, is expected to confirm what we already saw in the CPI and the PPI, right? Softer, weaker, which is actually better. It's talking inflation is cooling off, right? But that, that was helped in part by lower energy prices last month. That's great, but that was then. This is now, and we can expect that these 3 reports are gonna be short-lived as the oil exploded higher over the past 2 weeks and remains closer to the $90 range versus the the $67 range. We're also going to get the first look at the second quarter GDP, with economists expecting the economy to have grown at about a 2% annualized pace, which is not hot. It's good. It's kind of steady, right where we, you know, we could be a little bit higher. Maybe European markets are all higher. The Bank of England is expected to leave rates unchanged today, but investors are going to be listening closely to what Governor Bailey, uh, says, what his comments are about any indication that the recent spike in oil prices is going to change his or their inflation outlook. Remember last week the European Central Bank, uh, also chose to stand down and leave rates unchanged, adopting that same kind of data-dependent approach that we're hearing from, uh, Fed Chair Kevin Walsh. Now this morning, US futures are higher. Go, go figure. Dow up 120, S&P's up 18, NASDAQ's up 275, the Russell's up 12. Cooler heads appear to be prevailing after yesterday's algo and momo Temper tantrum. Now we'll see whether today's economic data and tonight's earnings from Apple and Amazon give investors a reason to keep on buying or send them right back to hitting the sell button. The S&P closed last night at 7— 7,316. It was down 112 points. The move takes us deeper into the official 7,200-7,460 trading range, which is defined by trendline support and trendline resistance. But we are approaching the June low of 7,300, which, which isn't a trendline level, but it might just be an area that proves to be an area of support. And we're going to find that out today. While futures are pointing higher, yesterday's selling will need to be tested once again. Now, if that happens today, maybe it happens tomorrow, maybe it happens next week, which is why 7,300 is important. If we test it and hold, that's a positive. If we test it and fail, then expect 7,200 to be right in the bullseye and the next level of support. In either case, nobody should be surprised at this action because we've discussed this ad nauseam coming into this whole summer season. Now, for the long-term investor, the sell-off should be seen as a gift because there are a lot of opportunities out there. So it's time to take out your shopping list and see what you find. I mean, take a look. Have you seen IBM? It's up 15% after its recent pullback. I mean, hello, right? Have you been paying attention? Now, if you'd like to discuss your goals, evaluate the risk in your portfolio, simply just get a second opinion, feel free to give me a call at 561-931-0190. And yes, I will answer the phone. I'm always happy to provide a complimentary portfolio review and risk assessment on your portfolio. Okay, so what do we have for dinner tonight? We're gonna have the penne alla diavola, right? That's the devil's penne. It's when arrabbiata isn't angry enough, because yesterday the markets were angry. It's the Calabrian chilies that bring a slow burn to this sauce. The tomatoes that give it depth. And just when you think it's going to knock you over, it's the cream that steps in and smooths it all out. It's rich without being heavy, yet spicy without being punishing. So let's go, because here's how you're going to make it. For the sauce, you're going to need— uh, well, for the dish, you're going to need a pound of penne rigate. You need the olive oil. You need 4 or 5 cloves of garlic, thinly sliced. You need a small shallot, again thinly sliced. You need 2 tablespoons of Calabrian chili paste, more if you want to make it hotter. You need a teaspoon of crushed red pepper flakes, a quarter cup of tomato paste. You need one 28-ounce can of San Marzano crushed kitchen-ready tomatoes, half a cup of heavy cream, half a cup of freshly grated Pecorino Romano cheese, and of course salt and pepper. You're going to finish it off with fresh basil that you're just going to tear. Always have extra Romano— Pecorino Romano on the table. And you're going to have a little splash of olive oil to drizzle. Now first you're going to bring a large pot of salted water to a rolling boil on the back burner. Leave it there for when you need it. In a large sauté pan, you're gonna heat up the olive oil over medium heat. You're gonna add the shallot, cook it until it's softened, ah, maybe 3 minutes. Then you're gonna stir in the garlic, cook it for another minute or so. You don't wanna burn it, so be careful. Now you're gonna add the Calabrian chili paste. You're gonna add the crushed red pepper. You're gonna add the tomato paste. You're gonna let all that cook for 2 or 3 minutes. You're gonna stir it, and this is where the magic starts. Now you're gonna add the crushed tomatoes, season it lightly with salt and pepper. You're going to let the sauce simmer for 12 to 15 minutes until it thickens, right? So bring it up to a boil and then turn it down to simmer. Um, then when you're ready, you're going to take it off the heat. Um, you're going to stir in the heavy cream, and then the sauce is going to turn a beautiful deep orangey red, right? Now you're going to add the penne to the boiling water. You're going to cook that for about 8 minutes. Then you're going to use a slotted spoon. You're going to, you're going to add the penne directly into the sauté pan. You're going to mix it well. You're going to add a ladle of the pasta water, otherwise known as The tears of the gods. You're gonna mix it really well so it gets all nice and creamy. Then you're gonna stir in the Pecorino Romano cheese and continue tossing until the sauce becomes silky. Add another splash of the pasta water if you think you need it. Now, you're gonna finish this off with torn basil and a drizzle of the olive oil. Always, always have fresh Pecorino Romano on the table for your guests. Now, here's a sidekick. You can always make this even more delicious and hot by sautéing crumbled hot Italian sausage in a bit of olive oil, and then add it to the finished sauce and mix it well with the pasta and enjoy. It is delicious. So look, it's trying to clear up today. I can feel it. It's spitting and it's not spitting. The sun wants to come out, then it doesn't want to come out. So we'll see what that says about today's market. Until tomorrow, take good care.