Investors are gearing up for a week of significant market events that could shape the near-term trajectory of U.S. stocks, following a period of heightened volatility. The upcoming week promises to be crucial, as it features a series of pivotal developments, including earnings reports from major technology companies, a key Federal Reserve policy meeting, and the release of July’s employment data.
The intense rally experienced by large technology stocks over recent months faced a sharp reversal in the latter half of July. This downturn reached a peak on Wednesday when both the S&P 500 and the Nasdaq Composite Index experienced their most substantial single-day losses since 2022. The selloff was triggered by disappointing earnings reports from major tech giants, including Tesla and Alphabet, Google’s parent company. The market’s reaction highlights the growing anxiety among investors about the sustainability of high valuations in the tech sector.
In the coming week, investors will closely monitor earnings reports from several of the largest tech companies, including Microsoft, Apple, Amazon, and Meta Platforms (formerly Facebook). The results from these tech titans are particularly crucial, as they could either reinforce or challenge the current market sentiment. The significant gains in these tech stocks earlier this year had driven broader market increases but have also raised concerns about potentially overextended valuations. If these companies fail to meet earnings expectations, it could exacerbate existing market uncertainties and lead to further volatility.
The Federal Reserve’s monetary policy meeting, scheduled for Wednesday, will also be a focal point for market participants. Investors are keenly awaiting the Fed’s stance on interest rates, with widespread expectations that the central bank will signal potential rate cuts in the near future. Recent soft inflation data and cautious comments from Fed officials have fueled speculation that a rate cut could be on the horizon, potentially starting in September. The Fed’s decision and accompanying statements will provide critical insights into the central bank’s outlook on economic conditions and its approach to monetary policy.
Additionally, the employment data set to be released at the end of the week will be closely scrutinized. This data includes the monthly jobs report, which is expected to show around 177,500 new nonfarm payrolls, a decrease from the 206,000 jobs added in May. The unemployment rate is anticipated to remain steady at 4.1%. These figures will offer valuable clues about the labor market’s health and could influence investor expectations regarding future Fed actions.
Recent market behavior indicates a shift away from high-flying tech stocks toward other sectors that had lagged behind earlier in the year. This rotation is evident in the performance of various indices: the Russell 1000 Value Index has risen more than 3% month-to-date, while the Russell 1000 Growth Index has fallen nearly 3%. The small-cap-focused Russell 2000 Index has gained nearly 9% this month, contrasting with a more modest decline of over 1% in the S&P 500.
Despite potential strong earnings from tech giants, Keith Lerner, Chief Market Strategist at Truist, suggests that even positive results might not be sufficient to lift the broader market from its recent slump. He notes that the significant pullback in tech stocks could lead to a situation where investors might be eager to sell into any short-term gains.
Furthermore, any indications from the Fed that economic conditions are deteriorating more than expected could unsettle investors, challenging the current narrative of cooling inflation paired with resilient growth. Federal Reserve Chair Jerome Powell has yet to provide concrete hints about the timing of rate cuts, but the market is anticipating at least one cut by the end of 2024, with expectations of a total reduction of 66 basis points according to CME’s FedWatch Tool.
Matt Peron, Global Head of Solutions at Janus Henderson Investors, emphasizes that the Fed will likely remain data-dependent, although economic signals have been mixed. Strong GDP growth in the second quarter has been offset by weakening manufacturing activity, adding to the complexity of the economic outlook.
Charles Lemonides, Head of Hedge Fund ValueWorks LLC, offers a longer-term perspective, suggesting that the recent selloff could be a healthy correction in a bull market, potentially clearing out excess speculative fervor. He believes that growth stocks may drive the next market high eventually.
In summary, this week’s key events will be critical in determining the direction of the stock market. Earnings reports from major tech companies, the Federal Reserve’s policy decisions, and the latest employment data will all play crucial roles in shaping market sentiment and future expectations.