The market bull run is at its most vulnerable in months.
The S&P 500 (^GSPC) closed below 5,000 on Friday, the first time it has closed below that mark since late February. Meanwhile, the Nasdaq Composite Index (^ IXIC) fell more than 5% in the week, but the Dow remained flat.
This week, key indicators on economic growth and inflation, as well as the start of big tech earnings, will determine whether the economic downturn continues.
In terms of economic data, preliminary figures for first-quarter economic growth are expected to be released on Thursday, followed by the March personal consumption expenditures index, the Fed’s preferred measure of inflation, on Friday.
In corporate news, a number of S&P 500 companies are expected to report quarterly results, led by Meta (META), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA), and Chipotle (CMG). .
Inflation gauge recommended by the Fed
Volatile inflation indicators in recent months have forced investors to scale back expectations for the Federal Reserve to cut interest rates this year.
On Friday, Chicago Fed President Austan Goolsby said it “makes sense” for the central bank to wait until there is more clarity on the trajectory of inflation, saying “inflation progress is stalling.”
This makes Friday’s PCE numbers even more important.
Economists expect “core” PCE to rise 2.7% year-on-year in March, slowing from February’s 2.8% annualized rise. Economists expect “core” PCE to rise 0.3% last month, in line with last month’s change.
“Core PCE inflation is expected to be around 0.25%.” [month-over-month] The year-over-year rate of change in March and April slowed to 2.6% from 2.8%, and the Fed will likely begin to ‘gradually’ adjust rates lower starting in June or July,” said Andrew Hollenhorst, an economist at Citi. wrote it in a memo. Customer on April 17th.
growth update
One reason investors are taking the Fed’s decision to cut interest rates so well is that economic conditions are becoming increasingly positive. Economists have been raising their economic growth forecasts throughout the first quarter. Thursday will provide the first test of whether the U.S. economy grew at the expected pace in the first three months of this year.
Economists expect the U.S. economy to grow at an annual rate of 2.5% in the first quarter, lower than the 3.4% growth rate in the fourth quarter of 2023.
“Emerging data indicates that the economy remains resilient even in a rising interest rate environment,” Bank of America U.S. economist Michael Gapen said in a note to clients on Friday. . “Consumer sentiment continues to be strong. The economy has cooled modestly since the staggering 4.9% growth rate in the third quarter, but that cooling is gradual.”
Earnings are not impressive
Even better-than-expected profits won’t move the stock price needle, given the huge stock price gains some of the market’s rallying darlings have experienced this year.
“The whole market is having digestion issues in and around this earnings season,” Julien Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI, told Yahoo Finance.
This was prevalent across stock reactions the day after quarterly earnings releases for the 65 S&P 500 companies that have reported earnings so far this season. Stocks that beat Wall Street expectations rose 0.8% in the next session, slightly below the 0.9% average over the past few years, according to Emanuel’s research.
Meanwhile, companies that disappointed on both metrics were hit harder than usual, with their average stock price falling 5.8% in the next session compared to the typical 3.1% decline seen over the past five years. .
“Given these expanded assessments, [in the S&P 500]especially with these names that have been in the running for so long, good news may not be good news,” Emanuel said.
big tech on deck
With earnings reports not satisfying investors, the baton will be passed to Big Tech, one of the strongest parts of the market over the past year.
Despite a sell-off across the tech industry last week following disappointing earnings from chipmakers and Netflix (NFLX), expectations for earnings growth from Meta, Microsoft and Alphabet due to be announced next week remain very high. expensive.
FactSet noted Friday that these companies, along with Nvidia (NVDA) and Amazon (AMZN), are expected to post a 64.3% increase in first-quarter profits. The other 495 companies are expected to see profits decline by 6%.
Rapid increase in yields
Beyond earnings, investors will be watching economic data closely this week to see what changes they make to the upward movement in bond yields, which is once again a thorn in the side of investors.
On Tuesday, the two-year bond yield rose to 5% for the first time since the stock’s most recent low in October 2023. The move came after Federal Reserve Chairman Jerome Powell said it was taking “longer than expected” for inflation to come down to normal. The goal is 2%.
And Evercore ISI’s Emanuel thinks this will be a big pain point for stocks, just as it was during last fall’s market crash.
“The reason it’s more concerning at the moment is because of the implicit promise that the market is trading on three factors.” [Fed rate] “And if you look back to March, I think it’s more than just a conviction that the market reversed from its highs literally the moment the market started to fall below the three promised,” Emanuel said. Cut. ”
Emanuel warned that this may mean it’s time to get defensive in the market. While he recommends exposure to sectors such as healthcare (XLV) and consumer staples (XLP), the roughly 5% you get from holding cash in money market accounts is still a viable part of your portfolio. he pointed out.
weekly calendar
Monday
Economic data: Chicago Fed Nat Activity Index for March (previous +0.05)
Revenue: Albertsons (ACI), Bank of Hawaii (BOH), Cleveland-Cliffs (CLF), Nucor (NUE), SAP (SAP), Trust (TFC), Verizon (VZ), Zions Bank (ZION)
Tuesday
Economic data: S&P Global US Manufacturing PMI, April, preliminary figures (forecast 52.0, previous 51.9). S&P Global US Services PMI, April, preliminary figures (expected 52, previous 51.9). S&P Global US Composite PMI, April, preliminary figures (expected 52, previous 52.1). Richmond Fed Manufacturing Business Index for April (previously -11). New home sales in March (estimated at 670,000 units, previously 662,000 units). New home sales, month-on-month, March (forecast 1.2%, -0.3% last time)
Revenue: 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 home loan applications week ending April 19th (+3.3% last week). Durable goods orders, preliminary figures for March (forecast +2.5%, previous +1.3%)
Revenue: Meta Platform (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, initial forecast (expected annualized rate of +2.5%, previously +3.4%). Personal spending in the first quarter, first forecast (expected to increase 2.6%, previously 3.3%). Number of first-time unemployment insurance claims for the week ending April 20th (expected 215,000, previously 212,000). Pending home sales, m/m, March (expected +1.0%, previous +1.6%)
Revenue: 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: March personal income, month-on-month change (forecast +0.5%, previous +0.3%). Personal spending in March compared to the previous month (expected +0.6%, previous +0.8%). His PCE inflation rate in March, month-on-month (expected + 0.3%, previous + 0.3%). March PCE inflation rate, year-on-year (expected +2.6%, previously +2.5%). “Core” PCE for March compared to the previous month (forecast +0.3%, previous +0.3%). “Core” PCE in March compared to the previous year (forecast +2.7%, previous +2.8%). University of Michigan consumer sentiment, April, final value (expected 77.9, previous 77.9)
Revenue: ExxonMobil (XOM), Chevron (CVX), Charter Communications (CHTR), Colgate (CL)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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