Market turmoil is likely to continue next week as the Federal Reserve meets and the biggest of the big technologies — Apple and Microsoft-report earnings.
Stocks on Friday closed their worst week in months, with huge losses in technology and consumer discretionary names. FANG darling Netflix was torn after this Thursday afternoon’s earnings, and merchants are watching to see if the same fate will wipe out other big technology names.
The Federal Reserve meeting on Tuesday and Wednesday is ahead of all else for the markets, as investors await any new indications on how much the central bank will raise interest rates this year and whether when it starts. The economist expects the Fed to guide markets to a quarter-percentage-point March rate hike.
There is also an avalanche of major earnings reports expected, including nearly half of the Dow 30’s blue chips, such as 3M, IBM, Intel, Caterpillar and American Express. The two largest stocks in terms of market capitalization, Microsoft and Apple, reported on Tuesday and Thursday respectively.
The economy will also be the focus of a first look at fourth-quarter GDP on Thursday, and personal consumption spending data on Friday, which includes the Fed’s preferred inflation measure.
Stocks could land for more volatile trading, after a wild week of seesaw action that resulted in steep declines in major indices.
The Nasdaq lost more than 5.7% for the week ended Friday afternoon, its worst weekly loss since October 2020. The weakest key sector for the week was consumer discretionary, off about 7%; financial, down 5.6% and technology, down 5.5%.
The earnings season has been mixed so far with some high-profile stock reactions when investors didn’t like what they heard.
Netflix’s stock crater after it discussed disappointing subscriber data on Thursday, and JP Morgan Chase fell sharply last week when it reported higher costs and slower trading activity.
“We don’t think the earnings period is a macro catalyst to send indexes significantly in one direction or the other. It’s a stock-by-stock story,” said Julian Emanuel, chief equity, derivatives and quantitative strategist at Evercore ISI.
“Good reports are likely to be rewarded but in a more muted way, whereas companies miss out on either [revenues or earnings] is not equal to punishment. It doesn’t matter if you beat or miss, but if you have negative comments about margins and costs, you will pay a price, ”he added.
Both inflation coming out of rising costs on company profits and higher prices has become a major concern for the Fed. Investors will listen intently to hear how worried the Fed is about inflation when Chairman Jerome Powell told the media Wednesday afternoon after the Federal Open Market Committee released its statement.
The Fed is not expected to raise interest rates or change policy at this meeting, but it could set a stage for how it will behave when it finishes the bond -buying program, most likely in March. Many economists expect that the Fed may start raising the target rate of fed funds from near zero with a quarter-percentage-point hike in March.
“The baseline is we see four increases and the start of quantitative tightening somewhere around the middle until later in the year,” Emanuel said. “I don’t think the Fed will do anything to talk the market out of that position.”
The Fed also said it could move to narrow its balance sheet this year, and that is another type of policy tightening, as the central bank withdrew from replacing maturing securities in its balance sheet with market purchases. . That in essence will begin to reduce the size of the nearly $ 9 trillion balance.
The Fed has become more hawkish, or in favor of rate increases and other policy restrictions, especially since it released its forecast in December. Powell is unlikely to change his tone this week, even with stocks selling, Emanuel said.
“If Powell comes out as dovish, the assumption will be positive for the market, but we can argue that’s not the case,” he said. “If the market doesn’t really believe he’s going with the four-hike plan, it’s very likely that the 10-year yield that exceeds the three-year range by exceeding 1.80%, could make very fast moving to 2 %. “
He added “growth is backfooted versus value. That would be very destabilizing for the market.”
The Fed is considered to be behind the curve by some Fed observers.
“The Fed has never responded this slowly to an emerging inflation risk and even now indicates a benign hiking cycle,” wrote Ethan Harris, head of global economic research at Bank of America. “If they’re wrong, and inflation settles closer to 3% than 2%, it’s bad news for both stocks and bonds.”
The bond yields a stall
Bond yields continued to ladder-step higher early last week but fell again at the end of the week. The widely watched benchmark 10-year Treasury yield hit 1.9% mid-week before dropping back to 1.75% on Friday.
Ian Lyngen, BMO head of U.S. rates strategy, said the bond market is pricing a step up in the fed funds rate of 1.75%. He said the Fed needs to indicate that it can push the funds target higher so that the 10-year reaches 2%
“We expect it to be together in this range by Wednesday,” Lyngen said. “If the Fed doesn’t come out as more hawkish, then we’ll see a classic ‘buy the rumor, sell the fact,’ and the 10-year yield will go down.” Yields are moving opposite the price.
Technology and growth stocks were most negatively impacted by rising rates. Those stocks are valued in anticipation of their future earnings, and the assumption is that in an environment of cheap money, valuations may be higher.
But as the Fed tightens and inflation continues to flare up, many strategists are hoping that cyclical and value stocks will get better. Since the beginning of the year, the technology sector has dropped by almost 10%. Energy was the outperformer, and the only major sector higher this year, up 13.5%.
“The whole purpose of the Fed here is to tighten financial conditions so that in a way, if you’re the Fed what you saw in the first three weeks of the year you could be completely fine,” Emanuel said. “I think if you’re Powell you’re going to try to talk the market out of the mode that it’s currently in. I think you’re pretty happy with how the year started.”
Emanuel expects the S&P 500 to end the year at 5,100. As for the current sell-off, he said the S&P 500 is likely to reach its 200-day moving average at approximately 4,425, but there is no guarantee that this sell-off will be below.
Calendar ahead of the week
Monday
Earnings: IBM, Zions Bancorp, Halliburton, Royal Phillips, Steel Dynamics
9:45 am Manufacturing PMI
945 am Service PMI
Tuesday
The Federal Reserve Open Market Committee meeting will begin
Earnings: Microsoft, Johnson at Johnson, American Express, Verizon, 3M, General Electric, Texas Instruments, Raytheon Technologies, Lockheed Martin, Archer Daniels Midland, Canadian National Railway, Hawaiian Holdings, Capital One, Paccar, F5 Networks, Boston Properties
9:00 am S & P/Case-Shiller home prices
9:00 am FHFA house price
10:00 am Consumer confidence
Wednesday
Earnings: Intel, Boeing, AT&T, Tesla, Whirlpool, General Dynamics, Anthem, Abbott Labs,, Nasdaq, Levi Strauss, Knight-Swift Transportation, Samsung Electronics, ServiceNow, Xilinx, Seagate Technology, Lam Research, Teradyne, Raymond James, Flex, SLM , LendingClub
8:30 am Advance economic indicators
10:00 am New home sale
2:00 pm FOMC decision
2:30 pm Briefing with Fed Chairman Ben Bernanke
Thursday
Earnings: Apple, McDonald’s, Visa, Comcast, International Paper, Blackstone, Mastercard, Mondelez, Robinhood, Altria, JetBlue, Deutsche Bank, STMicroelectronics, Diageo, Marsh at McLennan, Sherwin-Williams, T. Rowe Price, Ball Corp, Diageo, Nucor, Alaska Air, Tractor Supply, SAP, Dow, Southwest Air, Northrop Grumman, HCA Healthcare, McCormick, Textron, Valero Energy, Ethan Allen, KLA Corp, Beazer Homes, Western Digital, Eastman Chemical, Canadian Pacific Railway, Celanese, Olin, Danaher , Murphy’s Oil
8:30 am Preliminary unemployment claims
8:30 am Durable equipment
8:30 am Q4 advance real GDP
10:00 am Pending home sale
Friday
Earnings: Chevron, Caterpillar, Colgate-Palmolive, Weyerhaeuser, Synchrony Financial, Charter Communications, Philips 66, Church & Dwight, Booz Allen Hamilton, LyondellBasell Industries, VF Corp
8:30 am Personal income/expenditure
8:30 am Q4 Employment cost index
10:00 am Consumer sentiment
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