For Wall Street This is the most vulnerable stage of the market surge in months.
For the first time since late February, the S&P 500 (^GSPC) closed below 5,000 on Friday. In the meantime, the Dow remained unchanged for the week while the Nasdaq Composite (^IXIC) fell more than 5%.
If the slump persists, it will be determined this week by crucial reports on inflation and economic growth as well as the beginning of Big Tech earnings.
Regarding Wall Street economic statistics, the Fed’s favorite inflation indicator, the Personal Consumption Expenditures index, will release its March reading on Friday, and the advanced reading of first-quarter economic growth is scheduled for Thursday.
In Wall Street news, a number of S&P 500 firms are anticipated to release their quarterly earnings, with Meta (META), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA), and Chipotle (CMG) leading the pack.
The preferred inflation measure of the Fed
Investors have been compelled to reduce their expectations for Federal Reserve interest rate cuts this year as a result of many months of volatile inflation readings.
According to Chicago Fed President Austan Goolsbee, “progress on inflation has stalled” and it “makes sense” for the central bank to hold off on raising rates until more information on inflation’s trajectory is available.
This increases the importance of Friday’s PCE reading.
The “core” PCE is expected by economists to have increased by 2.7% in March over the prior year, compared to a 2.8% annual gain in February. As in the previous month, analysts predict that the “core” PCE increased by 0.3%.
In a note to clients on April 17, Citi economist Andrew Hollenhorst stated, “Should core PCE inflation come in around 0.25% [month-over-month] for March and April, the year-on-year reading will slow from 2.8% to 2.6%, giving the Fed cover to begin ‘gradually’ adjusting policy rates lower starting in June or July.”
Wall Street Growth report
A contributing factor in Wall Street’s general acceptance of the Fed’s interest rate cut repricing has been the improving economic environment. Economists have been increasing their forecasts for economic growth during the first quarter. The first assessment of whether the US economy expanded as quickly as anticipated in the first three months of this year will be available on Thursday.
As opposed to the 3.4% growth seen in the fourth quarter of 2023, economists predict that the US economy will expand at an annualized rate of 2.5% in the first quarter.
“Incoming data continue to point to ongoing economic resilience in an environment of higher rates,” Bank of America US economist Michael Gapen said. “The consumer continues to remain strong. The economy has cooled modestly since the outsized 4.9% growth rate seen in 3Q, but what cooling there is has been gradual.”
Wall Street Profits don’t quite cut it.
Even better-than-expected profits aren’t causing equities to move in the right direction given the considerable share price run-up that some of the darlings of this market rally have had this year.
The head of Evercore ISI’s equity, derivatives, and quantitative strategy, Julian Emanuel, told Yahoo Finance that “the broader market is having digestion problems in and around this earnings season.”
The day after the 65 S&P 500 businesses that have released results so far this season released their quarterly reports, stock reactions were generally observed to reflect this. According to Emanuel’s research, stocks that beat Wall Street’s projections rose by 0.8% in the following trading session, which is marginally less than the 0.9% average observed over the previous few years.
Companies that underperform on both measures, however, are suffering greater losses than usual; in the subsequent trading day, the average stock fell 5.8%, as opposed to the 3.1% average decline observed over the previous five years.
“Given these extended valuations [in the S&P 500], even good news may not be good news, particularly in these names that have run as far as they have,” Emanuel stated.
Big Tech
Investors will no longer be satisfied with profit reports, therefore Big Tech—one of the market segments that has performed the best over the previous year—will take over.
Even though the IT industry saw a sell-off last week due to dismal results from chipmakers and Netflix (NFLX), expectations for Meta, Microsoft, and Alphabet’s earnings growth remain extremely high. These companies are all scheduled to report this coming week.
These businesses, together with Nvidia (NVDA) and Amazon (AMZN), are predicted by FactSet to have raised their earnings by 64.3% in the first quarter. This information was published on Friday. It is predicted that the profits of the remaining 495 enterprises will decrease by 6%.
Sharp increases in yields
Aside from earnings, investors will be intently monitoring this week’s economic data to see whether it could influence movements in increasing bond yields, which are starting to irritate them once more.
For the first time since the most recent stock market low in October 2023, the yield on the 2-year Treasury note surged to 5% on Tuesday. The action was taken in response to Federal Reserve Chair Jerome Powell’s statement that the rate of inflation is “longer than expected” to reach the 2% target.
Additionally, Emanuel of Evercore ISI thinks that this will be a major source of pain for stocks, similar to what happened during the market’s sell-off last October.
“The reason it might be more of the concern at this point is because of that implicit promise that markets have traded on of three cuts dialed back,” Emanuel stated. “And if you look at it going back to March, I think it’s a lot more than a confidence the market rolled over from the highs literally precisely the moment the market started pricing in fewer than those three promised cuts.”
According to Knightsbridge, this could mean it’s time to become defensive in the market. Exposure to industries including consumer staples and health care was advised.
Wall Street Weekly Calendar
Monday
Economic data: Chicago Fed Nat Activity Index, March (+0.05 prior)
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, 51.9 previously); S&P Global US composite PMI, April, preliminary (52 expected, 52.1 previously); Richmond Fed Manufacturing Index, April (-11 prior); 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% prior); Durable Goods Orders, March preliminary (+2.5% expected, +1.3% prior)
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% annualized rate expected, +3.4% previously); First quarter personal consumption, first estimate (+2.6% expected, 3.3% previously); Initial jobless claims, 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-over-month, March (+0.5% expected, +0.3% previously); Personal spending, month-over-month, March (+0.6% expected, +0.8% previously); PCE inflation, month-over-month, March (+0.3% expected, +0.3% previously); PCE inflation, year-over-year, March (+2.6% expected, +2.5% previously); “Core” PCE, month-over-month, March (+0.3% expected, +0.3% previously); “Core” PCE, year-over-year, March (+2.7% expected; +2.8% previously); University of Michigan consumer sentiment, April, final reading (77.9 expected, 77.9 previously)
Earnings: Exxon Mobil (XOM), Chevron (CVX), Charter Communications (CHTR), Colgate (CL)
Shayne Heffernan
