The stock market rally is currently at a fragile point, with the S&P 500 ending below 5,000 for the first time since late February. The Nasdaq Composite also experienced a significant drop, while the Dow remained flat. This week, critical readings on economic growth and inflation, as well as the start of Big Tech earnings, will determine if the market malaise continues.
The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures index, has been a focal point for investors. Recent bumpy inflation readings have led to a scaling back of projections for Federal Reserve interest rate cuts this year. Economists expect “core” PCE to have risen by 2.7% in March from the previous year, down from February’s 2.8% annual gain. This makes Friday’s PCE reading critical.
On the economic growth front, economists expect that the US economy grew at an annualized rate of 2.5% in the first quarter, lower than the 3.4% seen in the fourth quarter of 2023. Despite this, investors have largely taken the repricing of Fed interest rate cuts in stride due to an increasingly positive economic backdrop.
However, even better-than-expected earnings aren’t moving the needle for stocks. The market’s digestion problems around this earnings season have been evident across stock reactions following the release of quarterly results. Companies that disappoint on both metrics are taking a bigger hit than normal.
Big Tech earnings reports are expected to play a significant role in market trends. Despite a sell-off across tech last week, earnings growth expectations remain high for Meta, Microsoft, and Alphabet. These companies, along with Nvidia and Amazon, are expected to have grown earnings by 64.3% in the first quarter.
Investors will also closely watch the economic data this week to see how it might shift movements in rising bond yields, which are becoming a pain point for investors again. The 2-year Treasury yield shot up to 5% on Tuesday for the first time since the most recent stock market bottom in October 2023.
In conclusion, the current market landscape is complex and volatile, with inflation concerns, Big Tech earnings, and bond yields playing significant roles. Investors should remain vigilant and informed to navigate these challenging times.
