David Randall
NEW YORK (Reuters) – Jittery investors are awaiting earnings from the market’s biggest technology companies, a Federal Reserve policy meeting and a week of closely watched jobs data that could determine the near-term direction of U.S. stocks after a severe bout of turmoil.
Big Tech’s months-long rally hit a brick wall in the second half of July, culminating in a sell-off, with disappointing earnings from Tesla (NASDAQ: NASDAQ: ) and Google sending tech stocks and indexes higher on Wednesday It recorded the largest one-day drop since 2022.
There may be more volatility ahead. Next week’s earnings from Microsoft (NASDAQ: ), Apple (NASDAQ: ), Amazon (NASDAQ: ) and Facebook parent Meta Platforms (NASDAQ: ) could further test investor sentiment. Tolerance of potential profit shortfalls for tech giants. A strong rebound in the world’s largest technology companies this year has pushed markets higher but also raised concerns about stretched valuations.
Although the S&P 500 remains only about 5% below its all-time high and is up nearly 14% this year, some investors worry that Wall Street may be too optimistic about earnings growth, leaving the stock market vulnerable if companies fail to meet expectations. over the next few months.
Investors will also be closely watching comments after the Federal Reserve’s monetary policy meeting on Wednesday for clues on whether officials are prepared to cut interest rates, which market participants widely expect to begin in September. Employment data this weekend, including the closely watched monthly jobs report, could indicate whether the labor market’s nascent decline has become more severe.
“This is a critical moment for the market,” said Bryant VanCronkhite, senior portfolio manager at Allspring. “People are starting to question why they are paying such high prices for these artificial intelligence businesses, and there are concerns that the Fed will miss out on a soft landing.” opportunities and trigger violent reactions.
There have been signs in recent weeks that investors are shifting away from high-flying technology leaders and into market sectors that have underperformed for much of the year, including small caps and value stocks such as financials.
So far this month, the Russell 1000 Value Index is up more than 3%, while the Russell 1000 Growth Index is down nearly 3%. The small-cap-heavy index is up nearly 9% this month, while the S&P 500 is down more than 1%.
Keith Lerner, chief market strategist at Truist, said even strong earnings may not be enough to lift the market out of its recent downturn, at least in the short term.
“The market will determine its direction based on the fact that these stocks pull back,” he said. “My thought is that tech stocks are down so much that even if these stocks rebound on earnings, people will be eager to sell to get any gains.”
Any sign that the economy is deteriorating more than expected by the Fed could also unsettle investors, upsetting the narrative that inflation has cooled but economic growth remains resilient, which has supported markets in recent months.
“We think they will continue to follow the playbook of relying on data, but the data is not moving in a straight line,” said Matt Peron, global head of solutions at Janus Henderson Investors. Conflicting signs in the economy include faster-than-expected GDP growth in the second quarter and manufacturing activity decline.
According to CME’s FedWatch tool, the market is now almost certain that the Federal Reserve will start cutting interest rates at its September meeting, and expects a total of 66 basis points of interest rate cuts by the end of the year.
Those odds could be affected if this weekend’s jobs data shows the economy is slowing faster than expected or, conversely, if there are signs of a growth rebound.
Still, the recent sell-off can be seen as a healthy part of a bull market that removes excess froth, said Charles Lemonides, principal at hedge fund ValueWorks LLC.
“I think over the long term, growth stocks will lead us to another market high at some point in the future,” he said.
