Wall Street will navigate a number of key factors over the coming week, but could still face a number of risks heading into the end of the third quarter as it looks to build on late-September gains fueled in part by the Federal Reserve's interest rate cuts.
The S&P 500, fresh off its best five-day advance of the year ahead of last week’s Fed rate decision, has extended its 2024 gain to about 20% heading into the final three months of the year. The benchmark index is supported in part by a resilient economy, rising corporate profits and a newly dovish outlook from the central bank.
Large-cap tech stocks, of course, are responsible for the bulk of the benchmark index's gains, but analysts are starting to see a steady rotation into value and mid-cap stocks. The Russell 2000 has far outpaced the gains of both the S&P 500 and the tech-focused Nasdaq over the past month.
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That rotation, tied to the Fed's long-term rate projections, will be tested this week with key readings on consumer confidence, business activity and new home sales, all expected during the first three days of trading.
Data from Bank of America's weekly “Flow Show” report suggest investors are still hoping to find value in the stock market. Some $33.8 billion flowed into U.S. equity funds last week, the third-highest total of the year.
“While rate cut bets have fluctuated throughout 2024, solid earnings growth and strong performance from a broader range of sectors have propelled the S&P 500 to new high after new high,” said Bret Kenwell, U.S. investment analyst at eToro.
“As long as the economy holds up and inflation doesn't flare back up, lower rates and solid earnings growth can continue to drive stocks higher over the long term.”
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The biggest risks heading into the end of the week include the Labor Department's weekly count of jobless claims (the final reading before its crucial September jobs report on Oct. 4), as well as the release of the Fed's preferred inflation gauge, the PCE price index, before trading begins on Friday.
Before the market opens on Thursday, the Commerce Department will also release its second revision of second-quarter GDP growth, which was last pegged at 3%.
Micron and Costco earnings are in sight
In terms of earnings, chipmaker Micron technology (IN) will release its fiscal fourth-quarter report after the close of trading on Wednesday. That release is expected to feature key developments in memory chip pricing as well as a broader view of ai investment going into the final months of the year and beyond.
Citigroup analysts suggest that about 80% of Micron investors are bearish ahead of the report, adding that “buy-side expectations for November quarter guidance are in line with or slightly below our revised estimates of $8 billion in revenue and $1.24 in earnings per share.”
Micron shares have fallen more than 37% since the group reported disappointing third-quarter earnings on June 26.
Related: stocks set for big Fed boost after summer rate cut review
Discount warehouse retailer Costco (COST) Meanwhile, facebook is set to release its quarterly earnings after the close of trading on Thursday, just weeks after unveiling its first membership fee increase in more than seven years.
Costco's outlook will be an important component in understanding the strength of consumer spending heading into the holiday period, with more details to come with the start of third-quarter earnings season in mid-October.
LSEG data suggest that collective S&P 500 earnings for the three months ending in September are likely to rise 5.7% from a year ago to $512.7 billion on an equity-weighted basis.
That pace is set to accelerate noticeably in the final months of the year, with LSEG data forecasting a 13.4% rise in collective gains for the bluechip benchmark.
Bond markets and the soft landing of the economy
Bond markets are also likely to be in focus this week after a curious reaction to the Fed's taper that sent 10-year yields to 3.745% and 2-year yields above 3.6%.
The Treasury will sell $183 billion in new coupon-bearing bonds this week, including an auction of $69 billion in 2-year notes on Tuesday.
Another key event this week, which will include several public statements from Fed officials, will be a speech by Chairman Jerome Powell ahead of the U.S. Treasury Bond Market Conference in New York, before the start of trading on Thursday.
Last week, the half-point cut in the federal funds rate left the rate between 4.75% and 5%. Powell's remarks to the media after the decision suggested that while inflationary pressures are likely to continue to ease through the end of the year, labor market weakness is beginning to develop in ways that could, at least for the time being, weigh on the surprisingly resilient economy.
Related: Fed makes big rate cut, signals focus on cooling labor market
Bank of America described the move as a “soft cut” that could support bets on a soft landing — one that would ease inflation without a recession — for the world’s largest economy. The investment firm added that the S&P 500 rose about 10% in the first six months after similar rate cuts in 1984, 1995 and 2019.
“If all goes according to plan, inflation numbers will continue to moderate before settling into the Fed's target sometime late next year or early 2026,” said Elizabeth Renter, senior economist at NerdWallet. “And hopefully there won't be a significant economic downturn in the process.”
More economic analysis:
- Surprise jobs report strengthens case for further interest rate cuts by the Federal Reserve
- Jobs report will indicate timing and size of Fed interest rate cuts in the fall
- Fed rate cuts may not guarantee a stock market rebound in September
Mimi Duff, managing director of GenTrust, is a bit more skeptical, saying the surge in volatility in August and the cooling labor market need to be closely watched.
“We believe markets are pricing in too high a probability of a perfect soft landing at the moment,” he said. “We see a higher probability of a recession/slowdown over the next year than markets are pricing in, and this is driving our underweight in equities.”
Related: Veteran fund manager sees world of trouble ahead for stocks
