Stock markets closed with mixed results last week as the debate over when or if the Federal Reserve will cut interest rates continued to top investors' minds.
This week, the Nasdaq Composite Index (^IXIC) rose more than 1%, while the S&P 500 (^GSPC) was roughly flat. The Dow Jones Industrial Average (^DJI) fell more than 2%. All three indexes remain near all-time highs.
After a quiet week on the economic data front, investors will be greeted next week with a key reading on the Fed's favorite inflation measure. A second update on first-quarter economic growth and data on consumer confidence are also on the economic schedule.
On the corporate side, earnings season is officially wrapping up, with Salesforce.com (CRM), Costco (COST), Dollar General (DG), and Best Buy (BBY) all seeing relatively slow quarterly earnings announcement schedules.
The market was closed Monday in observance of Memorial Day.
Fee dispute
Stronger-than-expected U.S. economic output and more hawkish Fed officials in minutes from the central bank's May meeting have led investors to scale back interest-rate cut expectations again. Investors now expect fewer than two rate cuts this year, and the debate has shifted to whether the Fed will deliver its first rate cut by September.
As of Tuesday, the market was pricing in a 48% chance that the Fed would not cut rates in September, according to the CME FedWatch tool, a big change from the 70% chance investors were pricing in a month ago.
Goldman Sachs' economics team on Friday pushed back its forecast for the Fed's first rate cut from July to September, but noted that “the timing of that first rate cut remains a difficult question.”
David Mericle, Goldman's chief U.S. economist, said his team still views these rate cuts as “optional” given the strength of the economy seen in data like last week's better-than-expected business activity index. All else being equal, signs of economic strength “reduce the urgency” for the Fed to cut rates, Mericle argued.
Mericle added that Goldman expects inflation to “improve significantly” by September but will still likely remain above the Fed's 2% target, giving it more options.
With earnings season nearly over, Truist co-chief investment officer Keith Lerner told Yahoo Finance that discussions about the Fed, inflation and economic data will likely dominate markets again in the near future.
“It just makes the market more volatile,” Learner said.
New check on prices
The trajectory of inflation remains critical to the Fed's rate-cutting schedule, and markets will get an update on its progress on Friday with the release of the personal consumption expenditures (PCE) index.
Economists expect “core” PCE, the Fed's preferred measure that excludes volatile food and energy sectors, to have risen 2.8% year-over-year in April, unchanged from March's increase. Month-over-month, economists expect “core” PCE to have risen 0.3%, also in line with last month.
Another Economic Growth Update
U.S. economic growth in the first quarter of 2024 turned out to be much weaker than economists had expected. On April 25, the Bureau of Economic Analysis released preliminary first-quarter U.S. gross domestic product (GDP) figures, showing the economy growing at an annualized rate of 1.6% during the period, below the 2.5% forecast by economists surveyed by Bloomberg.
A second report is due on Thursday, and economists believe the GDP figure will fall to 1.3% this time after retail sales data for February and March was revised down. But Michael Gapen, US economist at Bank of America, wrote in a client note that this should not be an ominous sign about the health of the US economy.
“Final sales to domestic buyers (GDP minus trade and inventories) should remain strong,” Gapen wrote. “In short, the economy slowed somewhat in the first quarter but remains stable overall.”
Revenue Scorecard
Nvida's (NVDA) long-awaited earnings released on Wednesday did little to lift the overall market, but the AI leader's better-than-expected revenues helped improve first-quarter revenue growth for the S&P 500.
Last week, the S&P 500 was showing a 5.7% growth pace, and after Nvidia's report, the index is showing a 6% growth pace for the first quarter.
And importantly, strategists believe the outsized impact on Nvidia's earnings will diminish over the course of the year, helping to extend the stock's gains.
Orson Kwon, U.S. and Canada equity strategist at Bank of America, told Yahoo Finance that the first phase of the AI cycle has already begun, with companies like NVIDIA (NVDA) seeing growing earnings as tech giants like Alphabet (GOOG, GOOGL), Amazon (AMZN) and Microsoft (MSFT) invest in the growing technology, but the payoffs are starting to widen as sectors like utilities and energy have seen stocks rally recently.
“We don't think it's just about NVIDIA anymore,” Kwon said. “It's expanding into areas like power, FMCG, public works.”
In a recent research note, Kwon noted that Nvidia drove 37% of the S&P 500's profit growth over the past month, but is expected to grow just 9% over the next 12 months.
The case of the S&P 6,000
A robust earnings environment for the rest of the year is one factor many strategists cite for raising their year-end S&P 500 index targets. But Deutsche Bank's chief equity strategist Binky Chadha told Yahoo Finance that while people are “telling bullish stories,” equity positioning hasn't changed much over the past three months. Investors are “overweight” equities, according to Deutsche Bank's Positioning Index, but not at the “extreme” levels seen in 2021 or 2018.
This is one of several reasons why Chadha sees “upside risk” to his latest forecast, which sees the S&P 500 finishing at 5,500 by the end of 2024. Chadha believes there is room for stocks to rise further, especially as he feels the consensus is not currently pricing in a strong U.S. economy.
Chadha emphasizes that expectations for the U.S. economy have only just shifted from an impending recession to growth at or slightly below normal growth trends. As this consensus continues to rise and some believe the productivity of the U.S. workforce could soar, Chadha says it wouldn't be hard for the S&P 500 to reach 6,000 if the U.S. economy grows better than expected again this year.
“We've come a long way, but it seems we're not quite done yet,” Chadha said.
Weekly Calendar
Monday
The market will be closed in observance of Memorial Day.
Tuesday
Economic data: S&P CoreLogic Case-Shiller National Home Price Index, y/y, March (previous +6.38%); The Conference Board Consumer Sentiment Index, May (expected 96, previous 97); Dallas Fed Manufacturing Activity, May (expected -15, previous -14.5)
Revenue: BOX, CAVA
Wednesday
Economic data: MBA Mortgage Applications, week ending May 24 (+1.9% week-over-week); Richmond Fed Manufacturing Index, May (-7); Federal Reserve releases Beige Book
Revenue: Abercrombie & Fitch (ANF), Advance Auto Parts (AAP), American Eagle (AEO), BMO (BMO), C3.ai (AI), Chewy (CHWY), Dick's Sporting Goods (DKS), HP (HPQ), Okta (OKTA), Salesforce.com (CRM)
Thursday
Economic data: Q1 GDP, 2nd estimate (1.3% annual rate expected, previous +1.6%). Q1 Personal Consumption, 2nd estimate (+2.1% annual rate expected, previous +2.5%). Initial Jobless Claims for week ending May 25 (218K expected, previous 215K). Pending Home Sales, April m/m (-0.6% expected, previous +3.4%). Wholesale Inventories, April m/m, preliminary (-0.1% expected, previous -0.4%).
Revenue: Best Buy (BBY), Birkenstock (BIRK), Build-A-Bear Workshop (BBW), Burlington Stores (BURL), Canopy Growth (CGC), Costco (COST), Dollar General (DG), Foot Locker (FL), Hormel Foods (HRL), Kohl's (KSS), Marvel Technology (MRVL), MongoDB (MDB), Ulta Beauty (ULTA), and Zscaler (ZS)
Friday
Economic data: Personal Income MoM April (Est +0.3%, Previous +0.5%); Personal Consumption MoM April (Est +0.3%, Previous +0.8%); PCE Inflation MoM April (Est +0.3%, Previous +0.3%); PCE Inflation YoY April (Est +2.7%, Previous +2.7%); “Core” PCE MoM April (Est +0.3%, Previous +0.3%); “Core” PCE YoY April (Est +2.8%, Previous +2.8%)
Revenue: BRP (DOO.TO)
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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