Stocks retreated from record highs last week, pressured by a global tech outage that rattled the market. The S&P 500 dropped nearly 2%, and the Nasdaq Composite fell over 3.5%, marking their worst week since April. Conversely, the Dow Jones Industrial Average edged up by 0.7%.
This week, critical economic data and Big Tech earnings reports will steer market sentiment. The advanced reading of second-quarter GDP is due Thursday, followed by the June Personal Consumption Expenditures (PCE) index on Friday, the Fed’s preferred inflation gauge.
New inflation data last week pushed the market to fully price in the chance of a Federal Reserve rate cut by September. The upcoming PCE index is expected to show core inflation rose 2.5% year-over-year in June, down from May’s 2.6%.
Ahead of the Fed’s July 31 policy meeting, investors question if the economy can withstand the highest rates in over two decades. Thursday’s GDP reading is anticipated to show a 1.9% annualized growth rate for Q2, up from 1.4% in Q1.
Michael Gapen, head of economics at Bank of America Securities, anticipates healthy economic activity and declining inflation. Optimism over multiple rate cuts has shifted business sector performances within the stock market. Real Estate and Financials have led recent gains, while Technology and Communication Services lag.
Small caps have also joined the 2024 rally, with the Russell 2000 climbing about 8% over the past month, compared to the S&P 500’s less than 1% rise. This has sparked debates on the sustainability of small-cap outperformance.
UBS strategist Maxwell Grinacoff sees potential for continued rotation into lower-quality stocks if rate cuts stay on the table and political factors ahead of U.S. elections play out.
This week, the spotlight is on Tesla and Alphabet, reporting earnings on Tuesday. Their results will gauge investor appetite for 2023’s top trades. Despite recent sell-offs, both stocks have posted double-digit gains over the past six months. The key question remains: can the AI-driven surge continue?
Ryan Grabinski of Strategas Research Partners warns of potential disappointments with AI-related earnings. Big Tech’s performance will significantly influence the S&P 500’s earnings trajectory. According to FactSet, Alphabet, Nvidia, Meta, and Amazon are expected to grow earnings by 56.4%, while the rest of the S&P 500 is projected to grow by just 5.7%. Combining these, the S&P is on track for a 9.7% year-over-year earnings growth, the best since Q4 2021.
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