Stock-market investors may take their cues from a series of important events in the week ahead, including the Federal Reserveâs monetary-policy meeting, a closely-watched December employment report and an onslaught of earnings from megacap technology names, which all promise insight into the state of the economy and interest-rate outlook.Â
The benchmark S&P 500 index
SPX
Thursday closed at a record high for five straight trading days, the longest streak of its kind since November 2021. The index finished slightly lower on Friday, but clinched weekly gains of 1.1%, while the Nasdaq Composite
COMP
advanced 1% and the blue-chip Dow Jones Industrial Average
DJIA
gained 0.7% for the week, according to Dow Jones Market Data.
âWhat weâre seeing is the market participants are still playing catch-up from 2023, putting money on the sidelines to work,â said Robert Schein, chief investment officer at Blanke Schein Wealth Management.
âWall Street is still back at it trying to eke out gains as quickly as possible, so itâs very short-term oriented until we get big market-moving events,â he said, adding that one of the events could well be âa disappointing Fed speech.â
Fedâs Powell has good reasons to push back on rate cuts
Expectations that the Fed would begin easing monetary policy as early as March after its fastest tightening cycle in four decades have helped fuel a rally in U.S. stock- and bond-markets. Investors now mostly expect five or six quarter-point rate cuts by December, bringing the fed-funds rate down to around 4-4.25% from the current range of 5.25-5.5%, according to the CME FedWatch Tool.Â
See: Economic growth underlined by fourth-quarter GDP reinforces Fedâs cautious approach to rate cuts
While no interest-rate change is expected for the central bankâs first policy meeting this year, some market analysts think comments from Fed Chair Jerome Powell during his news conference on Wednesday are likely to shift the marketâs expectations and push back against forecasts of a March cut.Â
Thierry Wizman, global FX and interest rates strategist at Macquarie, said a stock-market rally, âtoo-dovishâ signals from the Fedâs December meeting, a still-resilient labor market and escalating Middle East conflicts may indicate that Powell has to keep the â[monetary] tightening biasâ next week.Â
The rally in the stock market could âconceivably backfireâ by virtue of a loosening of financial conditions, while the labor market has not weakened to the extent that the Fed officials would have hoped, Wizman told MarketWatch in a phone interview on Friday.
Further complicating things, fears that inflation could spike again in light of the conflict in the Middle East and Red Sea could reinforce Fedâs cautious approach to rate cuts, he said.Â
See: Oil traders arenât panicking over Middle East shipping attacks. Hereâs why.
Meanwhile, a shift to âneutral biasâ doesnât automatically mean that the Fed will cut the policy rate soon since the Fed still needs to go to âeasing biasâ before actually trimming rates, Wizman said. âI think the market gets too dovish and does not realize the Fed has very, very good reasons to push this [the first rate cut] out to June.âÂ
Markets are âlaser-focusedâ on January employment report
Labor-market data could also sway U.S. financial markets in the week ahead, serving as the âbig swing factorâ for the economy, said Patrick Ryan, head of multi-asset solutions at Madison Investments.Â
Investors have been looking for clear signs of a slowing labor market that could prompt the central bank to start cutting rates as early as March. That bet may be tested as soon as Friday with the release of nonfarm payroll data for January.
Economists polled by The Wall Street Journal estimate that U.S. employers added 180,000 jobs in January, down from a surprisingly strong 216,000 in the final month of 2023. The unemployment rate is expected to tick up to 3.8% from 3.7% in the prior month, keeping it near a half century low. Wage gains are forecast to cool a bit to 0.3% in January after a solid 0.4% gain in December.Â
âThatâs going to have everyone laser-focused,â Ryan told MarketWatch via phone on Thursday. âAnything that shows you real weakness in the labor market is going to question if the equity market is willing to trade at 20 plus times (earnings) this year.â The S&P 500 is trading at 20.2 times earnings as of Friday afternoon, according to FactSet data.Â
Six of âMagnificent 7â may continue to drive S&P 500 earnings higher
This coming week is also packed with earnings from some of the big tech names that have fueled the stock-market rally since last year.Â
Five of the so-called Magnificent 7 technology companies will provide earnings starting from next Tuesday when Alphabet Inc.
GOOG,
and Microsoft Corp.
MSFT,
take center stage, followed by results from Apple Inc.
AAPL,
Amazon.com
AMZN,
and Meta Platforms
META,
on Thursday.Â
Of the remaining two members of the âMagnificent 7,â Tesla Inc.
TSLA,
has reported earlier this week with its results âmassively disappointingâ Wall Street, while Nvidia Corp.âs
NVDA,
results will be coming out at the end of February.
See: Hereâs why Nvidia, Microsoft and other âMagnificent Sevenâ stocks are back on top in 2024
A number of the companies in the âMagnificent 7â have seen their stock prices hit record-high levels in recent weeks, which could help to drive the value of the S&P 500 higher, said John Butters, senior earnings analyst at FactSet Research. He also said these stocks are projected to drive earnings higher for the benchmark index in the fourth quarter of 2023.
In One Chart: Tech leads stock marketâs January rally by wide margin. Watch out for February.
In aggregate, Nvidia, Alphabet, Amazon.com, Apple, Meta Platforms, and Microsoft are expected to report year-over-year earnings growth of 53.7% for the fourth quarter of last year, while excluding these six companies, the blended earnings decline for the remaining 494 companies in the S&P 500 would be 10.5%, Butters wrote in a Friday client note.
âOverall, the blended earnings decline for the entire S&P 500 for Q4 2023 is 1.4%,â he said.Â
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