News
What to know this week
Stock markets closed the week with mixed results, as the debate over when, or if, the Federal Reserve will cut interest rates continued to be investors’ priority.
For the week, the Nasdaq Composite (^ IXIC) rose more than 1%, while the S&P 500 (^GSPC) was almost flat. The Dow Jones industrial average (^DJI) fell by more than 2%. All three indexes were still near record highs.
After a quiet week on the economic data front, a key reading of the Fed’s preferred inflation gauge is expected to greet investors next week. A second update on economic growth in the first quarter and a reading on consumer confidence are also on the economic calendar.
On the corporate front, earnings season is officially over, with Salesforce (CRM), Costco (COST), General Dollar (DG) and Best Buy (ABY) highlighting a lighter quarterly reporting schedule.
Markets will be closed on Monday for the Memorial Day holiday.
Evaluate debate
A Hotter-than-expected reading on US economic outputcombined with a hawk tone from Fed officials in the minutes of the central bank meeting in May, led investors to once again reduce expectations of interest rate cuts. Investors are now pricing in fewer than two cuts for the year, and the debate has shifted to whether or not the Fed will make its first cut by September.
On Friday, markets were predicting a 50% probability of the Fed not cutting in September, a notable change from the 70% probability that investors predicted a month ago. according to the CME FedWatch tool.
Goldman Sachs’ economic team rejected its call for the Fed’s first July-September cut on Friday, but noted that “the timing of the first cut remains a difficult question.”
Goldman’s chief U.S. economist David Mericle argued that his team still sees these cuts as “optional” given the strength of the economy seen in data like last week’s hotter-than-expected business activity reading. . Other things being equal, signs of strength in the economy “reduce the urgency” of cuts by the Fed, Mericle argued.
Mericle added that while Goldman expects inflation to “greatly improve” by September, it will likely still be above the Fed’s 2% target, increasing optionality.
With earnings season largely over, Truist Co-Chief Investment Officer Keith Lerner told Yahoo Finance that the discussion around the Fed, inflation and economic data will once again take center stage in markets in the near term.
“It just makes the market more volatile,” Lerner said.
Federal Reserve Chairman Jerome Powell holds a news conference following the central bank’s two-day monetary policy meeting in Washington, May 1, 2024. (REUTERS/Kevin Lamarque/File Photo) (Reuters/Reuters)
A new price check
The path of inflation remains crucial to the Fed’s rate-cutting schedule, and markets will get an update on any progress on Friday with the release of the Personal Consumption Expenditures (PCE) index.
The story continues
Economists expect April’s “core” PCE, the Fed’s preferred gauge that excludes volatile food and energy categories, to post a 2.8% annual gain, March flat increase. In the previous month, economists expect the “core” PCE to have risen 0.3%, also in line with last month’s variation.
Another economic growth update
US economic growth in the first quarter of 2024 was much weaker than economists expected. On April 25, the Bureau of Economic Analysis’s advance estimate of US gross domestic product in the first quarter showed that the economy grew at an annualized pace of 1.6% during the period, below the 2.5% growth expected by economists surveyed by Bloomberg.
The secondary reading is expected on Thursday, and economists believe that following downward revisions to retail sales data in February and March, the GDP number will fall to 1.3% at this reading. However, Bank of America US economist Michael Gapen wrote in a note to clients 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) are expected to remain strong.” Gapen wrote. “The bottom line is that the economy moderated a bit in the first quarter, but remains stable overall.”
Earnings Overview
While Nvida’s long-awaited earnings release (NVDA) did little to move the broader market higherO AI leader’s earnings beat improved S&P 500 earnings growth in the first quarter.
At the beginning of the week, the S&P 500 was on track to grow 5.7%. Following Nvidia’s report, the index is now on track for 6% growth in the first quarter.
More importantly, strategists believe Nvidia’s outsized impact on earnings will diminish as the year progresses, supporting a broadening of the stock market rally.
Bank of America US and Canadian equity strategist Ohsung Kwon told Yahoo Finance that the first stage of the AI cycle is already happening, with profits growing at companies like Nvidia (NVDA) as well as tech giants like Alphabet (GOOG, Google), Amazon (AMZN) and Microsoft (MSFT) invest in growing technology. But the rewards are starting to expand, with recent rallies in sectors such as utilities and energy.
“We no longer think it’s just about Nvidia,” Kwon said. “Things are broadening out… into energy, commodities, utilities, things like that.”
Kwon noted in a recent research note that Nvidia drove 37% of the S&P 500’s earnings growth last month. Over the next 12 months, it is expected to represent just 9%.
The case of the S&P 6,000
A solid earnings outlook for the rest of the year is one of several factors that many strategists cite as they revise their year-end targets for the S&P 500. But Deutsche Bank chief equity strategist Binky Chadha told Yahoo Finance that while people are “talking bullish,” the stock’s positioning hasn’t changed much over the past three months. Deutsche Bank’s positioning measure shows that investors are “overweight” equities, but not at the “extreme” levels seen in 2021 and 2018.
This is one of several reasons why Chadha sees “upside risks” in his updated forecast for the S&P 500 to end 2024 at 5,500. Chadha believes there could be more room to compete in the shares, especially since he feels the consensus is not currently pricing in outperformance for the U.S. economy.
Chadha highlights that expectations for the US economy have just changed an approaching recession for growth at or slightly below the normal trend. If this consensus continues to rise and the US economy returns to growth more than expected this year, in the middle of what some believe it could be a productivity boom For the U.S. workforce, it’s not hard to see the S&P 500 hit 6,000, according to Chadha.
“We’ve come a long way, but it feels like we’re not all the way,” Chadha said.
Weekly Calendar
Monday
Markets are closed for the Memorial Day holiday.
Tuesday
Economic data: S&P CoreLogic Case-Shiller National Home Price Index year-over-year, March (+6.38% prior); Conference Board Consumer Confidence, May (96 expected, 97 previous); Dallas Fed manufacturing activity, May (-15 expected, -14.5 previous)
Earnings: Box (BOX), Armhole (CAVA)
Wednesday
Economic data: MBA Mortgage Applications, Week Ending May 24 (+1.9% Previous); Richmond Fed manufacturing index, May (-7); Federal Reserve Releases Beige Book
Earnings: Abercrombie & Fitch (ANF), Advanced Auto Parts (AAP), American Eagle (OAS), OMO (OMO), C3.ai (AI), rubber (CHWY), Dick’s Sporting Goods (DKS), HP (HPQ), Okta (OKTA), Sales force (CRM)
Thursday
Economic data: First quarter GDP, second estimate (expected annualized rate 1.3%, +1.6% previously); Personal consumption in the first quarter, second estimate (+2.1% expected, 2.5% previously); Initial unemployment claims, week ending May 25 (218,000 expected, 215,000 previously); Pending home sales, month-over-month, April (-0.6% expected, +3.4% previously); Preliminary April wholesale inventories month-over-month (-0.1% expected, -0.4% previously)
Earnings: Best buy (ABY), Birkenstock (BIRK), Build a Bear Workshop (BBW), Burlington Stores (BURL), Canopy growth (CGC), Costco (COST), General Dollar (DG), Standing cabinet (Florida), Hormel Foods (HR), Kohl (KSS), Marvell Technology (MRVL), MongoDB (MDB), Ulta Beauty (ULTA), Zscaler (ZS)
Friday
Economic data: Personal income, month-to-month, April (+0.3% expected, +0.5% previously); Personal spending, month over month, April (+0.3% expected, +0.8% previously); PCE inflation, month-over-month, April (+0.3% expected, +0.3% previously); PCE inflation, year-over-year, April (+2.7% expected, +2.7% previously); “Main” PCE, month-to-month, April (+0.3% expected, +0.3% previously); “Main” PCE, year-over-year, April (+2.8% expected; +2.8% previously)
Earnings: BRP (DOO.TO)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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