By David Randall
NEW YORK (Reuters) – Nervous investors are bracing for earnings from the biggest technology companies, a Federal Reserve policy meeting and closely watched jobs data in a week that could determine the near-term path of U.S. stocks after a bout of severe turmoil.
A months-long rally in big tech stocks hit a wall in the second half of July, culminating in a sell-off that saw the index and the benchmark post their biggest one-day losses since 2022 on Wednesday after disappointing earnings from Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:ALG).
There could be more volatility ahead. Results next week from Microsoft (NASDAQ:), Apple (NASDAQ:), amazon.com (NASDAQ:) and facebook parent Meta Platforms (NASDAQ:), could further test investors’ tolerance for potential earnings shortfalls from the tech titans. Soaring gains by the world’s biggest tech companies this year have pushed markets higher but have raised concerns about inflated valuations.
Although the S&P 500 is still only 5% below its all-time high and is up nearly 14% this year, some investors fear that Wall Street has become too optimistic about earnings growth, leaving stocks vulnerable if companies fail to meet expectations in the coming months.
Investors will also be closely watching comments after the Federal Reserve's policy meeting on Wednesday for clues as to whether policymakers are willing to pursue interest rate cuts, which market participants expect to begin in September. Employment data due later in the week, including the closely watched monthly jobs report, could indicate whether the nascent labor market slowdown has become more severe.
“This is a critical moment for markets,” said Bryant VanCronkhite, senior portfolio manager at Allspring. “People are starting to question why they are paying so much for these ai companies at the same time the market is fearful that the Federal Reserve will miss its chance to secure a soft landing, and that’s causing a backlash.”
Recent weeks have shown signs of a rotation away from high-flying technology leaders toward sectors of the market that have languished for much of the year, including small-caps and value stocks such as financials.
The Russell 1000 Value Index is up more than 3% so far this month, while the Russell 1000 Growth Index is down nearly 3%. The small-cap-focused index is up nearly 9% this month, while the S&P 500 is down more than 1%.
Even solid earnings might not be enough to lift the broader market out of its recent malaise, at least in the near term, said Keith Lerner, chief market strategist at Truist.
“The market is going to go in a direction based on the fact that these stocks have pulled back,” he said. “I think the tech stocks fell so hard that even if there is a rally in these companies due to earnings, there will be people eager to sell on any gains.”
And any sign that the Fed is seeing a worse-than-expected deterioration in the economy could also unsettle investors, upsetting the narrative of slowing inflation but still resilient growth that has supported markets in recent months.
“We think they will continue to follow the script of being data-driven, but the data hasn't been in a straight line,” said Matt Peron, global head of solutions at Janus Henderson Investors. Mixed signals on the economy include faster-than-expected GDP growth in the second quarter coupled with a decline in manufacturing activity.
Markets are now pricing in with near-certainty that the Fed will begin cutting interest rates at its September meeting, and are expecting a total of 66 basis points in cuts by year-end, according to CME's FedWatch tool.
Jobs data later this week could change those odds if it shows the economy has been slowing more quickly than expected or, conversely, if a picture of a recovery in growth emerges.
Still, the recent sell-off could be seen as a healthy part of a bull market that's burning off the excess foam, said Charles Lemonides, head of hedge fund ValueWorks LLC.
“I think the long-term story is that growth names will take us to another market top at some point in the future,” he said.
!function(f,b,e,v,n,t,s){if(f.fbq)return;n=f.fbq=function(){n.callMethod? n.callMethod.apply(n,arguments):n.queue.push(arguments)};if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;n.queue=();t=b.createElement(e);t.async=!0;t.src=v;s=b.getElementsByTagName(e)(0);s.parentNode.insertBefore(t,s)}(window, document,’script’,’https://connect.facebook.net/en_US/fbevents.js’);
