Stocks closed last week with mixed results as debate about when, or if, the Federal Reserve will cut interest rates continued to be top of mind for investors.
For the week, the Nasdaq Composite (^IXIC) rose more than 1%, while the S&P 500 (^GSPC) was near flat. The Dow Jones Industrial Average (^DJI) fell 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 set to greet investors in the week ahead. A second update on economic growth in the first quarter and a reading on consumer confidence are also on the economic schedule.
On the corporate front, earnings season is officially winding down, with Salesforce (CRM), Costco (COST), Dollar General (DG), and Best Buy (BBY) highlighting a lighter schedule of quarterly reports.
Markets were closed on Monday for the Memorial Day holiday.
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Rate debate
A hotter-than-expected reading on US economic output, combined with a hawkish tone from Fed officials in the minutes of the central bank's May meeting, prompted investors to scale back expectations for interest rate cuts again. Investors are now pricing in fewer than two cuts for the year, and debate has shifted to whether or not the Fed will make its first cut by September.
As of Tuesday, markets were pricing in a 48% chance the Fed doesn't cut in September, a noted shift from the 70% chance investors had priced in a month ago, per the CME FedWatch tool.
Goldman Sachs' economics team pushed back its call for the first Fed cut from July to September on Friday but noted the "timing of the first cut remains a difficult question."
Goldman's chief US economist David Mericle reasoned that his team still views these cuts as "optional" given the strength of the economy seen in data like last week's hotter-than-expected business activity reading. All else equal, signs of strength in the economy "lessen the urgency" for the Fed to cut, Mericle reasoned.
Mericle added that while Goldman expects inflation to be "much improved" by September, it will still likely be above the Fed's 2% target, adding to the optionality.
With earnings season largely over, Truist co-chief investment officer Keith Lerner told Yahoo Finance the discussion around the Fed, inflation, and economic data will once again take center stage for markets in the near term.
"That just makes for a more volatile market," Lerner said.
Federal Reserve Chair Jerome Powell holds a press conference following the central bank's two-day policy meeting in Washington, May 1, 2024. (REUTERS/Kevin Lamarque/File Photo) ·(Reuters / Reuters)
A fresh check on prices
Inflation's trajectory remains crucial to the Fed's rate-cutting timeline, and markets will get an update on any progress on Friday with the release of the Personal Consumption Expenditures (PCE) index.
Economists expect April's "core" PCE, the Fed's preferred gauge that excludes the volatile food and energy categories, clocked in at an annual gain of 2.8%, flat from March's increase. Over the prior month, economists expect "core" PCE rose 0.2%, down from 0.3% the month prior.
Another economic growth update
US economic growth for the first quarter of 2024 came in far weaker than economists had expected. On April 25, the Bureau of Economic Analysis's advance estimate of first quarter US gross domestic productshowed the economy grew at an annualized pace of 1.6% during the period, missing the 2.5% growth expected by economists surveyed by Bloomberg.
The secondary reading is slated for Thursday, and economists believe after down revisions to retail sales data in February and March, the GDP number will fall to 1.3% in this reading. However, Bank of America US economist Michael Gapen wrote in a note to clients that this shouldn't be an ominous sign about the health of the US economy.
"Final sales to domestic purchasers (GDP less trade and inventories) should remain strong." Gapen wrote. "The bottom line is that the economy moderated somewhat in the first quarter, but it remains on a stable footing overall."
Entering last week, the S&P 500 had been pacing for growth of 5.7%. After Nvidia's report, the index is now pacing for growth of 6% in the first quarter.
And, importantly, strategists believe Nvidia's outsized impact on earnings will decline throughout the year, supporting a broadening of the stock market rally.
Bank of America US and Canada equity strategist Ohsung Kwon told Yahoo Finance that the first stage of the AI cycle has already been happening, with earnings growing at companies like Nvidia (NVDA) as tech giants like Alphabet (GOOG, GOOGL), Amazon (AMZN), and Microsoft (MSFT) invest in the growing technology. But the rewards are starting to expand, with recent rallies in sectors like Utilities and Energy.
"We don't think it's just about Nvidia anymore," Kwon said. "Things are broadening out ... to power, commodities, utilities, things like that."
Kwon noted in a recent research note that Nvidia drove 37% of the S&P 500's earnings growth over the past month. In the next 12 months, it's expected to represent just 9%.
The case for S&P 6,000
A solid earnings backdrop for the rest of the year is one of several factors many strategists are citing as they revise up their year-end targets for the S&P 500. But Deutsche Bank chief equity strategist Binky Chadha told Yahoo Finance while people are "talking bullish," equity positioning hasn't shifted much in the past three months. Deutsche Bank's measure of positioning shows investors are "overweight" equities but not to the "extreme" levels seen in 2021 and 2018.
This is one of several reasons Chadha sees "upside risks" to his updated call for the S&P 500 to end 2024 at 5,500. Chadha believes there could be more room to run for stocks, particularly given that he feels consensus isn't currently pricing in outperformance for the US economy.
Chadha highlights that expectations for the US economy have really just shifted from an incoming recession to at or slightly below normal trend growth. If that consensus continues to move higher, and the US economy once again grows more than expected this year amid what some believe could be a productivity boom for the US labor force, it's not hard to see the S&P 500 hitting 6,000, per Chadha.
"We've come a long way, but we don't seem to have gone 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 prior); Dallas Fed manufacturing activity, May (-15 expected, -14.5 prior)
Economic data: MBA Mortgage Applications, week ending May 24 (+1.9% prior); Richmond Fed manufacturing index, May (-7); Federal Reserve releases Beige Book
Earnings: 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 (CRM)
Thursday
Economic data: First quarter GDP, second estimate (1.3% annualized rate expected, +1.6% previously); First quarter personal consumption, second estimate (+2.1% expected, 2.5% previously); Initial jobless claims, week ended May 25 (218,000 expected, 215,000 previously); Pending home sales, month-over-month, April (-0.6% expected, +3.4% previously); Wholesale inventories month-over-month April preliminary (-0.1% expected, -0.4% previously)