Stocks wavered as traders assessed the outlook for corporate earnings amid the threats of a hawkish Federal Reserve, scorching inflation and a looming recession.
The S&P 500 was little changed after last week’s rally. The tech-heavy Nasdaq 100 underperformed, with giants like Apple and Google’s parent Alphabet on track to report results this week. The yield on 10-year Treasuries climbed back above 2.8% while the dollar fluctuated.
After raising rates in June by the most since 1994, Fed Chairman Jerome Powell and his colleagues are expected to approve another 75-basis-point hike Wednesday and signal their intention to keep moving higher in the months ahead. The economy is already feeling the pinch from the repeated rate increases, with the housing market softening, unemployment claims edging up and technology companies curbing hiring.
Growth is sputtering across the tech world, with investors bracing for mostly bad news from the megacaps. Amazon.com’s revenue is expected to grow at its slowest rate in decades. Chipmakers are lurching from boom times to a potential glut. Gig-economy companies such as Uber Technologies and DoorDash could be victims of consumer budget cutting. Then, there’s the pullback in online advertising, which is poised to weigh on results from Facebook owner Meta Platforms.
The question for investors is how much of the slowdown is already reflected in stock prices. For Nicholas Colas, co-founder of DataTrek Research, this week will be something of a “make-or-break” period for investors’ confidence in U.S. corporate earnings power.
“For the recent rally to continue, markets need to feel that monetary policy and corporate earnings power are incrementally more predictable than six weeks ago,” Colas wrote in a note to clients. “Our bias is to lighten up here, but even long-term investors should understand that this week is critical to market psychology.”
Goldman Sachs Group’s David Kostin expects revenues to come under pressure from a stronger dollar, while Bank of America strategists noted that corporate sentiment during earnings calls is deep in recession territory, pointing to a further big drop in results. Meantime, Citigroup and UBS Global Wealth Management strategists said the earnings season is turning out to be better than feared as consumer spending remains resilient, while stocks have already priced in much of the bad news.
Investors are skeptical that the Fed can tame the worst inflation in four decades without driving the economy into a recession. Over 60% of 1,343 respondents in the latest MLIV Pulse survey said there’s a low or zero probability that the U.S. central bank can rein in consumer-price pressures without causing an economic contraction.
On Sunday, Treasury Secretary Janet Yellen expressed confidence in the Fed’s fight against inflation and said she doesn’t see any sign the US economy is in a broad recession.
“Naturally, during times of market stress, every week seems pivotal,” wrote Strategas’ Jason De Sena Trennert and Ryan Grabinski. “Still, the next five days will be chock-a-block with earnings, economic releases, and economic events that are likely to set the tone for the market.”
The strategists added that they are still cautious on the market as “earnings estimates have not yet begun to discount what would seem to be some obvious pressures on profit margins.”
In corporate news, Apple announced a rare retail promotion in China, offering four days of discounts on its top-tier iPhones and related accessories in advance of the launch of its next-generation devices. Intel Corp. has secured one of the biggest customers to date for its year-old contract chipmaking arm. Regulators are directing U.S. operators of Boeing Co. 777 widebody jets to repair aircraft to address concerns about potential fuel-tank explosions, according to a filing Monday.
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