The market rally is at its most fragile point in months.
The S&P 500 (^GSPC) ended Friday below 5,000, its first close below that mark since late February. Meanwhile, the Nasdaq Composite (^IXIC) fell more than 5% for the week, while the Dow remained flat.
This week, critical economic growth and inflation figures, as well as the start of earnings from big tech companies, will determine whether the malaise persists.
On the economic data side, the advanced reading of first-quarter economic growth is scheduled for Thursday, followed by the March reading of the Personal Consumption Expenditures Index, the Fed’s preferred inflation gauge, on Friday.
In corporate news, a slew of S&P 500 companies are expected to report quarterly results, including Meta (META), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA), and Chipotle (CMG).
The Fed’s Favorite Inflation Indicator
Several months of erratic inflation figures have forced investors to lower their expectations that the Federal Reserve will cut interest rates this year.
On Friday, Chicago Fed President Austan Goolsbee said “progress on inflation has stalled,” stressing that it was “logical” for the central bank to wait for more clarity on the path of inflation. inflation.
This makes Friday’s PCE reading all the more critical.
Economists expect “core” PCE to rise to 2.7% in March from a year earlier, down from February’s 2.8% annual gain. Over the previous month, economists expect a 0.3% increase in “core” PCE, in line with last month’s variation.
“If underlying PCE inflation settles around 0.25% (month-on-month) for March and April, the year-on-year figure will slow from 2.8% to 2.6%, which will allow the Fed to begin ‘gradually’ adjusting its policy rates starting in June or July,” Citi economist Andrew Hollenhorst wrote in a note to clients on April 17.
Growth Update
Part of the reason investors have largely accepted the Fed’s reassessment of interest rate cuts is due to an increasingly positive economic backdrop. Throughout the first quarter, economists raised their forecasts for economic growth. Thursday will be the first glimpse of the U.S. economy growing as fast as expected in the first three months of this year.
Economists expect the U.S. economy to grow 2.5% annually in the first quarter, less than the 3.4% recorded in the fourth quarter of 2023.
“Available data continues to demonstrate continued economic resilience in a higher interest rate environment,” Bank of America U.S. economist Michael Gapen wrote in a note to clients Friday. “The consumer continues to remain strong. The economy has cooled slightly since the outsized 4.9% growth rate seen in the third quarter, but the cooling has been gradual.”
The gains are not impressive
Given the significant share price rise that some of the market darlings have seen this year, even better-than-expected earnings don’t shake things up for stocks.
“The market as a whole is having some digestive issues in and around this earnings season,” Julian Emanuel, who leads Evercore ISI’s equities, derivatives and quantitative strategy, told Yahoo Finance.
This was widely seen in stock market reactions the day after the release of quarterly results from the 65 S&P 500 companies that have reported results so far this season. Stocks that beat Wall Street estimates rose 0.8% in the next trading session, slightly lower than the 0.9% average seen in recent years, according to Emanuel’s research.
Meanwhile, companies that disappoint on both metrics take a bigger hit than usual, with the average stock falling 5.8% in the next stock market action, compared to the usual 3.1% decline seen over the last five years.
“Given these stretched valuations (in the S&P 500), even good news may not be good news, especially for these names that have reached such high heights,” Emanuel said.
Big Tech on deck
As the results do not satisfy investors, the baton will be passed to one of the strongest segments of the market over the past year: Big Tech.
Despite a sell-off in the technology sector last week after disappointing results from chipmakers and Netflix (NFLX), earnings growth expectations are still very high for Meta, Microsoft and Alphabet, all of which are expected to report results in the coming week.
FactSet noted Friday that these companies, along with Nvidia (NVDA) and Amazon (AMZN), are expected to have increased their profits by 64.3% in the first quarter. The other 495 companies are expected to see their profits decline by 6%.
Rising yields
Aside from earnings, investors will be closely watching economic data this week to see how it might alter upward moves in bond yields, which are once again becoming an issue for investors.
The 2-year Treasury yield climbed to 5% on Tuesday for the first time since the stock market’s most recent low in October 2023. The move comes as Federal Reserve Chairman Jerome Powell said it would take “more time than expected” for inflation to return to its 2% target.
And Evercore ISI’s Emanuel believes this will be a major problem for stocks, just as it was during a market sell-off last fall.
“The reason this might be more concerning at this point is the implicit promise that markets have traded three (Fed rate) cuts rolled back,” Emanuel said. “And if you look at that going back to March, I think it’s much more than a confidence that the market came off the highs literally at the exact moment that the market started to price in less than the three promised reductions.”
Emanuel warned that it may be time to take a defensive stance in the market because of this. He recommended exposure to sectors such as healthcare (XLV) and consumer staples (XLP), while emphasizing that the roughly 5% that can be earned by holding cash in a money market account still constitute a viable part of a portfolio.
Weekly calendar
Monday
Economic data : Chicago Fed Nat Activity Index, March (+0.05 previously)
Earnings: Albertsons (ACI), Bank of Hawaii (BOH), Cleveland Cliffs (CLF), Nucor (NUE), SAP (SAP), Truist (TFC), Verizon (VZ), Zions Bancorporation (ZION)
Tuesday
Economic data : S&P Global US Manufacturing PMI, April, preliminary (52.0 expected, 51.9 previously); S&P Global US Services PMI, April, preliminary (52 expected, previously 51.9); S&P Global US Composite PMI, April, preliminary (52 expected, 52.1 previously); Richmond Fed manufacturing index, April (-11 previously); New home sales, March (670,000 expected, 662,000 previously); New home sales, month-over-month, March (1.2% expected, -0.3% previously)
Earnings: Freeport-McMoRan (FCX), General Electric (GE), General Motors (GM), Halliburton (HAL), JetBlue (JBLU), Lockheed Martin (LMT), Mattel (MAT), PepsiCo (PEP), Raytheon Technologies (RTX) , Spotify (SPOT), Steel Dynamics (STLD), Tesla (TSLA), UPS (UPS), Texas Instruments (TXN), Visa (V)
Wednesday
Economic data : MBA mortgage applications, week ending April 19 (+3.3% previously); Durable goods orders, March preliminary (+2.5% expected, +1.3% previously)
Earnings: Meta Platforms (META), AT&T (T), Boeing (BA), Chipotle (CMG), Ford (F), Humana (HUM), ADP (ADP), eBay (EBAY), General Dynamics (GD), Hilton (HLT) ), IBM (IBM), O’Reilly Auto Parts (ORLY), ServiceNow (NOW), Viking Therapeutics (VKTX)
THURSDAY
Economic data : First quarter GDP, first estimate (+2.5% expected annualized rate, +3.4% previously); Personal consumption in the first quarter, first estimate (+2.6% expected, 3.3% previously); First unemployment registrations, week ended April 20 (215,000 expected, 212,000 previously); Pending home sales, month-over-month, March (+1.0% expected, +1.6% previously)
Earnings: Alphabet (GOOGL), Microsoft (MSFT), American Airlines (AAL), AstraZeneca (AZN), Caterpillar (CAT), Intel (INTC), Mobileye (MBLY), Roku (ROKU), Snap (SNAP), Royal Caribbean (RCL ), Southwest (LUV), T-Mobile (TMUS)
Friday
Economic data : Personal income, month-on-month, March (+0.5% expected, +0.3% previously); Personal spending, month-on-month, March (+0.6% expected, +0.8% previously); PCE inflation, month-on-month, March (+0.3% expected, +0.3% previously); PCE inflation, year-on-year, March (+2.6% expected, +2.5% previously); “Core” PCE, month-to-month, March (+0.3% expected, +0.3% previously); “Core” PCE, over one year, March (+2.7% expected; +2.8% previously); University of Michigan Consumer Confidence, April, final number (77.9 expected, previously 77.9)
Earnings: Exxon Mobil (XOM), Chevron (CVX), Charter Communications (CHTR), Colgate (CL)
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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