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) dropped greater than 5% on the week, while the Dow held flat.
This week, critical readings on economic growth and inflation, along with the start of Big Tech earnings, will determine if the malaise continues.
On the economic data side, the advanced reading of first quarter economic growth is slated 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 corporations are expected to report quarterly results headlined by Meta (META), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA), and Chipotle (CMG).
The Fed’s preferred inflation gauge
Several months of bumpy inflation readings have forced investors to in the reduction of their projections for Federal Reserve rate of interest cuts this yr.
On Friday, Chicago Fed president Austan Goolsbee said “progress on inflation has stalled” when noting that it “is smart” for the central bank to attend for more clarity on inflation’s path.
This makes Friday’s PCE reading all the more critical.
Economists expect “core” PCE clocked in at 2.7% in March from the previous yr, down from February’s 2.8% annual gain. Over the prior month, economists expect “core” PCE rose 0.3%, consistent with last month’s change.
“Should core PCE inflation can be found 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 start out ‘recurrently’ adjusting policy rates lower starting in June or July,” Citi economist Andrew Hollenhorst wrote in a note to clients on April 17.
Growth update
An element of the reason investors had largely taken the repricing of Fed rate of interest cuts in stride has been an increasingly positive economic backdrop. Throughout the first quarter, economists have been raising their projections for economic growth. Thursday will bring the first have a have a look at whether the US economy grew as fast as forecast in the first three months of this yr.
Economists expect that the US economy grew at an annualized rate of two.5% in the first quarter, lower than the three.4% seen throughout the fourth quarter of 2023.
“Incoming data proceed to point to ongoing economic resilience in an environment of upper rates,” Bank of America US economist Michael Gapen wrote in a note to clients on Friday. “The client continues to remain strong. The economy has cooled modestly since the outsized 4.9% growth rate seen in 3Q, but what cooling there’s has been gradual.”
Earnings aren’t impressing
Given the many run-up in share price that numerous the market rally’s darlings have experienced this yr, even better-than-expected earnings aren’t moving the needle for stocks.
“The broader market is having digestion problems in and around this earnings season,” Julian Emanuel, who leads Evercore ISI’s equity, derivatives, and quantitative strategy, told Yahoo Finance.
This has broadly been seen across stock reactions the day following the discharge of quarterly results for the 65 S&P 500 corporations which have reported results to this point this season. Stocks that top Wall Street’s estimates have risen 0.8% in the next trading session, barely lower than the 0.9% average seen over the last few years, per Emanuel’s research.
Meanwhile, corporations that disappoint on each metrics are taking a much greater hit than normal, with the standard stock falling 5.8% in the next trading motion, as compared with the usual 3.1% decline seen over the past five years.
“Given these prolonged valuations [in the S&P 500], even good news won’t be good news, particularly in these names which have run up to now as they’ve,” Emanuel said.
Big Tech on deck
With earnings reports not satisfying investors, the baton may be passed to one in all the strongest parts of the market over the past yr: Big Tech.
Despite a sell-off across tech last week after disappointing results from chipmakers and Netflix (NFLX), earnings growth expectations are still sky-high for Meta, Microsoft, and Alphabet, which might be all expected to report throughout the week ahead.
FactSet noted on Friday that these corporations, along with Nvidia (NVDA) and Amazon (AMZN), are expected to have grown earnings by 64.3% in the first quarter. The alternative 495 corporations are projected to see earnings decline by 6%.
Surging yields
Outside of earnings, investors will closely watch the economic data this week to see how it could shift movements in rising bond yields, which have gotten a pain point for investors again.
The 2-year Treasury yield shot as much as 5% on Tuesday for the first time since essentially probably the most recent stock market bottom in October 2023. The move came as Federal Reserve Chair Jerome Powell said it’s taking “longer than expected” for inflation to fall to its 2% goal.
And Evercore ISI’s Emanuel believes this could be a key pain point for stocks, simply because it was during a sell-off on the market last fall.
“The reason it’s more likely to be more of the priority at this point is as a consequence of that implicit promise that markets have traded on of three [Fed rate] cuts dialed back,” Emanuel said. “And for individuals who have a have a look at it going back to March, I feel it’s quite a bit greater than a confidence the market rolled over from the highs literally precisely the moment the market began pricing in fewer than those three promised cuts.”
Emanuel cautioned that it’s more likely to be time to get defensive on the market because of this. He really helpful exposure to sectors much like Health Care (XLV) and Consumer Staples (XLP) while also noting the roughly 5% that will probably be earned by holding money in a money market account stays to be a viable portion of a portfolio.
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); Recent home sales, March (670,000 expected, 662,000 previously); Recent 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)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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