Stocks ended the week with mixed results as the debate over when and if the Federal Reserve will cut rates continued to be a top focus for investors.
The Nasdaq Composite (^IXIC) rose more than 1% this week, while the S&P 500 (^GSPC) was essentially flat. The Dow Jones Industrial Average (^DJI) fell more than 2%. All three indexes were still near record highs.
After a quiet week on the economic data front, an important reading from the Fed’s preferred inflation gauge will hit investors in the coming week. A second update on first-quarter economic growth and an analysis of consumer confidence are also on the economic schedule.
On the corporate front, earnings season is officially coming to an end, with Salesforce ( CRM ), Costco ( COST ), Dollar General ( DG ) and Best Buy ( BBY ) emphasizing a lighter schedule of quarterly reports.
The markets are closed on Monday for Memorial Day.
Rate debate
A better-than-expected outcome in U.S. economic output, combined with an hawkish tone from Fed officials in the minutes of the central bank’s May meeting, prompted investors to once again lower expectations for rate cuts. Investors are now pricing in fewer than two cuts this year, and the discussion has shifted to whether or not the Fed will make its first cut in September.
As of Friday, markets were pricing in a 50% chance that the Fed would not cut in September, a notable shift from the 70% chance investors had priced in a month ago, according to the CME FedWatch tool.
Goldman Sachs’ economics team on Friday pushed back its call for the first Fed cut from July to September, but noted that the “timing of the first cut remains a difficult question.”
Goldman’s chief economist David Mericle reasoned that his team still views these cuts as “optional” given the strength of the economy evidenced by data such as last week’s better-than-expected business activity. All other things being equal, signs of strength in the economy will “reduce the urgency” for the Fed to cut spending, Mericle reasoned.
Mericle added that while Goldman expects inflation to be “much improved” in September, it will still likely be above the Fed’s 2% target, increasing discretion.
With earnings season largely over, Truist co-chief investment officer Keith Lerner told Yahoo Finance that discussion about the Fed, inflation and near-term economic data will once again take center stage in markets.
“That just makes for a more volatile market,” Lerner said.
A new check on prices
The inflation trajectory remains crucial to the Fed’s rate cut timeline, and markets will get an update on any progress on Friday with the release of the Personal Consumption Expenditures (PCE) index.
Economists expect April’s “core” PCE, the Fed’s preferred measure that excludes volatile food and energy categories, to post an annual gain of 2.8%, flat from March’s gain. Economists expect the core PCE to have risen 0.3% over the past month, also in line with last month’s change.
Another economic growth update
US economic growth for the first quarter of 2024 was much weaker than economists expected. On April 25, the Bureau of Economic Analysis’ preliminary estimate of first-quarter U.S. gross domestic product showed that the economy grew at an annual rate of 1.6% over the period, exceeding the 2.5% growth rate set was expected by economists polled by Bloomberg.
The secondary reading is scheduled for Thursday, and economists believe that after downward revisions to retail sales in February and March, the GDP figure will fall to 1.3% in this reading. However, Bank of America economist Michael Gapen wrote in a letter to clients that this should not be an ominous sign about the health of the US economy.
“Final sales to domestic buyers (GDP minus trade and inventories) should remain strong.” Gapen wrote. “The bottom line is that the economy has moderated somewhat in the first quarter, but remains on a stable footing overall.”
Revenue Scorecard
While Nvida’s (NVDA) long-awaited earnings results did little to lift the broader market, the AI leader’s earnings growth did improve the S&P 500’s first-quarter earnings growth.
Entering the week, the S&P 500 was on track for 5.7% growth. Following Nvidia’s report, the index is now targeting 6% growth in the first quarter.
And, importantly, strategists believe that Nvidia’s outsized impact on earnings will diminish throughout the year, supporting a broadening of the stock market rally.
Bank of America US and Canadian equity strategist Ohsung Kwon told Yahoo Finance that the first phase of the AI cycle has already happened, with earnings growth at companies like Nvidia (NVDA) and tech giants like Alphabet (GOOG, GOOGL), Amazon (AMZN) ). ) and Microsoft (MSFT) are investing in the growing technology. But the rewards are starting to materialize, thanks to recent rallies in sectors like utilities and energy.
“We don’t think it’s just about Nvidia anymore,” Kwon says. “Things are expanding… into power, raw materials, utilities and things like that.”
Kwon noted in a recent study that Nvidia accounted for 37% of the S&P 500’s earnings growth last month. In the next twelve months this is expected to be only 9%.
The case for S&P 6,000
A solid earnings backdrop for the rest of the year is one of several factors many strategists cite when revising their year-end targets for the S&P 500. But Binky Chadha, Deutsche Bank’s chief equity strategist, told Yahoo Finance, while people are “bullish to talk’. ”, the stock positioning has not changed much over the past three months. Deutsche Bank’s positioning measure shows that investors are ‘overweight’ equities, but not at the ‘extreme’ levels of 2021 and 2018.
This is one of many reasons Chadha sees “upside risks” to his updated call for the S&P 500 to end at 5,500 in 2024. Chadha believes there could be more room for equity investing, especially as he believes the consensus is not currently pricing in outperformance for the US economy.
Chadha emphasizes that expectations for the US economy have actually just shifted from a coming recession to trend growth that is at or slightly below normal. If that consensus continues to rise, and the U.S. economy grows stronger than expected again this year, amid what some say could be productivity growth for the U.S. workforce, it’s not hard to see the S&P 500 hitting 6,000 per Chadha .
“We’ve come a long way, but it seems like we haven’t gone all the way,” Chadha said.
Weekly calendar
Monday
The markets are closed for the Memorial Day holiday.
Tuesday
Economic data: S&P CoreLogic Case-Shiller National Home Price Index year-over-year, March (+6.38% prior); Consumer Confidence Conference Board, May (96 expected, 97 prior); Dallas Fed Manufacturing Activity, May (-15 expected, -14.5 previously)
Income: Box (BOX), Cava (CAVA)
Wednesday
Economic data: MBA mortgage applications, week ending May 24 (+1.9% prior); Richmond Fed Manufacturing Index, May (-7); Federal Reserve releases Beige Book
Income: Abercrombie & Fitch (ANF), Advance Auto Parts (AAP), American Eagle (AEO), BMO (BMO), C3.ai (AI), Chewy (CHWY), Dick’s Sporting Goods (DKS), HP (HPQ), Okta (OKTA), Salesforce (CRM)
Thursday
Economic data: First quarter GDP, second estimate (1.3% annualized expected, +1.6% earlier); Personal consumption in the first quarter, second estimate (+2.1% expected, 2.5% earlier); Initial unemployment claims, week ending May 25 (218,000 expected, 215,000 earlier); Pending home sales, month-over-month, April (-0.6% expected, +3.4% prior); Wholesale inventories month-on-month April provisional (-0.1% expected, -0.4% earlier)
Income: Best Buy (BBY), Birkenstock (BIRK), Build-a-Bear Workshop (BBW), Burlington Stores (BURL), Canopy Growth (CGC), Costco (COST), Dollar General (DG), Foot Locker (FL), Hormel Foods (HRL), Kohl’s (KSS), Marvell Technology (MRVL), MongoDB (MDB), Ulta Beauty (ULTA), Zscaler (ZS)
Friday
Economic data: Personal income, month-on-month, April (+0.3% expected, +0.5% prior); Personal expenses, month-on-month, April (+0.3% expected, +0.8% prior); PCE inflation, month-on-month, April (+0.3% expected, +0.3% prior); PCE inflation, year-on-year, April (+2.7% expected, +2.7% prior); “Core” PCE, month-over-month, April (+0.3% expected, +0.3% prior); “Core” PCE, year-over-year, April (+2.8% expected; +2.8% prior)
Income: BRP (DOO.TO)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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