Shares are closing out another trading week having hit new records.
Signs of a cooling in inflation made markets more optimistic about the prospect of interest rate cuts from the Federal Reserve. As a result, stocks rallied, with all three major averages hitting record highs on Wednesday.
The Nasdaq Composite (^IXIC) rose more than 2% this week, while the S&P 500 (^GSPC) fell more than 1.5%. The Dow Jones Industrial Average (^DJI) rose more than 1% and closed above 40,000 for the first time on Friday.
In the coming week, Nvidia’s (NVDA) highly anticipated earnings results are expected to be the main catalyst for the markets. The results of Target (TGT), Palo Alto Networks (PANW) and Lowe’s (LOW) will also be closely watched by investors.
The week is expected to be quieter on the economic front, with updates on activity in the manufacturing and services sectors and the latest consumer confidence figures for May. Minutes from the Fed’s May meeting are also expected on Wednesday afternoon.
Minute by minute
April’s Consumer Price Index analysis showed core prices, which exclude the more volatile costs of food and gas, rose 3.6% from last year – the lowest annual increase in three years. For the first time since early April, this prompted investors to price in two full interest rate cuts this year.
This move brings the market closer to Fed expectations of two or three rate cuts sometime this year. Brian Belski, chief investment strategist at BMO Capital Markets, cited investor coordination with the Fed on rate cuts as a reason for his call for the S&P 500 to end 2024 at 5,600, up less than 7% from Friday’s close .
For investors, the key question will be whether this bullish story is sustainable, or whether the market will again pull ahead of the Fed, as it did in early 2024, when investors priced in nearly seven rate cuts based on positive economic data. The first test will come Wednesday with the release of minutes from the May Federal Open Market Committee meeting, which will provide deeper insight into the discussion among officials.
“The minutes of the May FOMC meeting should sound marginally more aggressive than Chairman Powell’s press conference,” Bank of America economist Michael Gapen wrote in a note to clients. “While Powell indicated that the bar for rate hikes is high and that a standstill is the appropriate response to the lack of disinflation, others on the committee were more concerned about whether the policy was doing enough.”
The bulls are on the run
Belski’s year-end target was followed by another increase in forecasts on Friday. Binky Chadha, chief equity strategist at Deutsche Bank, raised his year-end target for the benchmark from 5,100 to 5,500. Chadha cited robust earnings growth and an improving macroeconomic outlook as reasons why stocks could continue to move higher.
“We see that the earnings cycle has plenty of legs,” Chadha said. “While full growth may not be realized this year, we see market confidence in a sustained recovery increasing towards year-end, supporting equity ratios.”
Nvidia’s big report
AI leader Nvidia will report earnings after the closing bell on Wednesday, adding to reports from the US tech giants. Expectations for the chipmaker are once again sky-high. Analysts expect Nvidia to have grown profits by more than 400% in the previous quarter, while revenue rose 242%, according to Bloomberg consensus data.
For the second quarter, analysts expect profit growth of more than 120% and turnover growth of almost 100%.
“We see ample room for NVDA to potentially reach $26 billion in Q1 (April) revenue (data center ~$22-23 billion) and potentially reach total revenue of ~$27-28 billion (data center ~ $25-26 billion) – both good enough to keep the stock price higher in our view,” UBS analyst Timothy Arcuri wrote in a note to clients previewing the earnings release.
The stock is up more than 86% in 2024 and more than 200% in the past year since Nvidia kicked off the AI hype train with its huge earnings report in May 2023. Given how Nvidia stock has influenced other potential AI businesses, and the broader market as a whole, all eyes will be on whether the company can live up to the hype again.
“Like [Nvidia] If we can continue their enviable, remarkable run of beating estimates, raising expectations, and then beating raised expectations next quarter, it means AI trading can and will continue apace,” wrote Steve Sosnick, chief strategist at Interactive Brokers, Thursday in a research note. However, if there is even the slightest sign of weakness, much more than just that stock will suffer.”
The expansion of the AI business
Nvida’s updates on the emerging demand for the technology come at a crucial time for the overall AI story. New companies in sectors are increasingly becoming aware of AI transactions.
Over the past week, Dell shares rose about 10% after analysts from Morgan Stanley and Evercore ISI unveiled bullish research on the company’s AI prospects.
The AI business has already expanded beyond the popular names like Nvidia, Microsoft (MSFT), Alphabet (GOOGL, GOOG), and Meta (META). Energy and utilities are two of the best-performing sectors in the S&P 500 this year, with both up more than 13%. While strategists have pointed to a catch-up in the utility sector (XLU), AI has also been a driver of enthusiasm. The same can be said for Energy (XLE).
Research from Goldman Sachs’ equity strategy team led by David Kostin shows AI mentions soared in the first quarter, amid a “broadening of AI trading.” More than 66% of energy sector companies mentioned AI during their earnings calls this quarter, compared to 19.1% last quarter.
JPMorgan Asset Management global market strategist Jack Manley said whether the AI story has legs “may be one of the most important questions we need to ask.”
“Is this AI stuff the real deal or is it a flash in the plan?” Manley told Yahoo Finance. “And I mean, honestly, the jury is still out on whether or not it will fundamentally change the world.”
He added: “If the markets wake up and say, ‘Hey, maybe we got a little too excited about this and maybe we pulled out some of these gains a little bit, and that’s reflected in those valuations .’ That’s where I think you have the potential for a bit of a rocky road.”
Weekly calendar
Monday
Income: Palo Alto Networks (PANW), Trip.com (TRIP), Zoom (ZM)
Economic news: No significant economic news.
Tuesday
Income: AutoZone (AZO), Macy’s (M), XPeng (XPEV), Toll Brothers (TOL), Urban Outfitters (URBN)
Economic news: Philadelphia Fed non-manufacturing activity, May (-12.4 prior)
Wednesday
Income: Nvidia (NVDA), Eleven Beauty (ELF), Petco (WOOF), Snowflake (SNOW), Target (TGT), TJX (TJX), Williams-Sonoma (WSM),
Economic news: MBA mortgage applications, May 17 (+0.5% previously); Existing home sales month-on-month, April (0% expected, -4.3% prior); Minutes of the FOMC meeting
Thursday
Income: BJ’s (BJ), Deckers Brands (DECK), Intuit (INTU), Polestar (PSNY), Ralph Lauren (RL), Ross Stores (ROST), TD Bank (TD), Workday (WDAY)
Economic news: Chicago Fed Nat Activity Index, April (0.15 previously); Initial unemployment claims, week ending May 18 (previously 222,000); S&P Global US manufacturing PMI, provisional May (50 previously); S&P Global US services PMI, preliminary May (51.3 previously); S&P Global US composite PMI, preliminary May (51.3 previously); Existing home sales month-on-month, January (5.0% expected, -1% earlier)
Friday
Income: Lamar (LAMR), Warner Bros. Discovery (WBD)
Economic news: Durable goods orders, provisional April (0% expected, 0.9% earlier); University of Michigan Consumer Sentiment, May Final (67.6 Expected, 67.4 Previous)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
Click here for an in-depth analysis of the latest stock market news and events affecting stock prices.
Read the latest financial and business news from Yahoo Finance
