July 26 2024: investors, rattled by recent market turbulence, are preparing for a critical week ahead with earnings reports from major tech companies, a Federal Reserve policy meeting, and important employment data. These events could significantly influence the short-term trajectory of U.S. stocks following a period of severe volatility.
A months-long rally in large tech stocks hit a significant hurdle in the latter half of July, culminating in a selloff. The S&P 500 and Nasdaq Composite Index experienced their largest one-day losses since 2022 on Wednesday after disappointing earnings reports from Tesla (NASDAQ
) and Google-parent Alphabet (NASDAQ
).
More volatility is anticipated. Next week’s earnings results from Microsoft (NASDAQ
), Apple (NASDAQ
), Amazon.com (NASDAQ
), and Facebook-parent Meta Platforms (NASDAQ
) could further test investors’ patience with potential earnings shortfalls from tech giants. The strong rallies in these leading tech companies have propelled markets higher but also raised concerns about overvalued stocks.
Although the S&P 500 is still only about 5% below its all-time high and has risen nearly 14% this year, some investors fear that Wall Street may be overly optimistic about earnings growth. This could leave stocks vulnerable if companies fail to meet expectations in the coming months.
Investors will also closely monitor the Federal Reserve’s comments following its monetary policy meeting on Wednesday for indications of potential interest rate cuts, which are widely expected to start in September. Additionally, employment data at the end of the week, including the crucial monthly jobs report, could reveal whether a nascent slowdown in the labor market is becoming more pronounced.
“This is a critical time for the markets,” said Bryant VanCronkhite, a senior portfolio manager at Allspring. “Investors are beginning to question the high valuations of AI businesses, while simultaneously fearing that the Fed might miss the opportunity to achieve a soft landing, causing significant market reactions.”
Recent weeks have shown signs of a shift away from high-flying tech leaders towards market sectors that have underperformed for much of the year, such as small caps and value stocks, including financials.
The Russell 1000 Value index is up more than 3% for the month so far, while the Russell 1000 Growth index is down nearly 3%. The small-cap-focused Russell 2000 has risen nearly 9% this month, whereas the S&P 500 has declined by more than 1%.
Even strong earnings might not be sufficient to lift the broader market out of its recent downturn, at least in the short term, according to Keith Lerner, chief market strategist at Truist.
“The market’s direction will likely depend on how these tech stocks perform after their pullback,” he said. “Even if earnings cause a bounce, many investors may be eager to sell and take any gains.”
Additionally, any indication that the Fed perceives a worsening economy could unsettle investors, disrupting the narrative of cooling inflation alongside resilient growth that has supported markets recently.
“We expect the Fed to maintain its data-dependent approach, but the data has been inconsistent,” said Matt Peron, global head of solutions at Janus Henderson Investors. Conflicting economic indicators include faster-than-expected GDP growth in the second quarter alongside declining manufacturing activity.
Markets are currently pricing in a high probability that the Fed will begin cutting interest rates at its September meeting, with expectations of 66 basis points in total cuts by the end of the year, according to CME’s FedWatch Tool.
The employment data at the week’s end could influence these expectations, showing either a faster-than-expected economic slowdown or signs of rebounding growth.
Despite the recent selloff, some see it as a healthy correction in a bull market, said Charles Lemonides, head of hedge fund ValueWorks LLC. “The longer-term outlook is that growth stocks will eventually lead us to new market highs,” he said.
