← Go back Jul 07, 2023
A pivotal week for markets started with small gains in stocks as traders braced for rate decisions from major central banks and a deluge of corporate earnings. In the run-up to the Federal Reserve and European Central Bank gatherings, investors got a reminder about the side effects of aggressive policy tightening. Disappointing data from the U.S. and the euro-area added to bets officials are close to ending their hiking cycles to prevent a recession. Aside from the economic picture, more than 500 companies worldwide with a combined $27 trillion in value were set to report results, including giants Microsoft, Alphabet and Meta Platforms. "This week will offer plenty of opportunity to test the stock-market rally that began on Oct. 12," said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management. "Traders will be seeking to gain further insight into the direction the markets are likely to take from here." The Dow Jones Industrial Average rose for an 11th straight day - its longest winning run since 2017. The S&P 500 traded near 4,550, while the Nasdaq 100 underperformed as new weightings intended to reduce the dominance of megacaps took effect Monday. Two-year U.S. bond rates climbed as an auction drew the highest yield since 2007. The dollar fluctuated. Bitcoin briefly fell below $29,000. West Texas Intermediate crude topped $78 a barrel. Wheat and corn gained as Russia attacked one of Ukraine's biggest Danube river ports. Tesla advanced after disclosing strong sales outside the U.S. and China. Apple gained as Bloomberg News reported the company is keeping its iPhone shipments steady despite the 2023 turmoil. AMC Entertainment rallied as a surprise court ruling Friday scuttled a stock conversion plan the cinema chain has now revised. Chevron rose on solid earnings. The delayed impact of aggressive rate hikes by central banks worldwide, dwindling consumer savings and a "deeply troubling" geopolitical backdrop are poised to trigger renewed volatility, according to JPMorgan Chase strategist Marko Kolanovic. Kolanovic also noted that the stock-price reaction to earnings reports is expected to be muted, as the market was strong coming into the second-quarter reporting season. Investors have mostly shrugged off positive earnings surprises from companies that reported results so far, according to strategists at Bank of America. Moves were on average 1.3 percentage points larger than implied by the options market, but the direction was skewed to the downside. "This suggests increased positioning risk and good news having been priced in," BofA strategists led by Savita Subramanian added. To Chris Larkin at E*Trade from Morgan Stanley, tech may "hold the key" to the continuation of the near-term bullish enthusiasm of stock traders as big names get ready to report their quarterly numbers. Indeed, the stakes are high for heavyweight technology firms, which have fueled an advance of over 40% for the Nasdaq 100 this year. The "big seven" - Apple, , Nvidia, Tesla, Meta, Microsoft and Alphabet - now trade at a record premium to the bottom 493 stocks in the S&P 500, according to BofA's Subramanian. "We expect big tech earnings to be mixed and the real test will be for companies that have significant exposure to artificial intelligence, as investors are eager to see if these companies can report strong enough results to support their significantly elevated share prices in recent months," said James Demmert, chief investment officer at Main Street Research. The S&P 500's high valuation is reasonable and could rise further this year as laggards of the index join the surge in winners from artificial intelligence, according to Goldman Sachs strategists. While the broker's base-case scenario is for the S&P 500's price-to-earnings ratio to shrink slightly to 19 times from the current level of about 20 by the end of 2023, strategists led by David J Kostin said the risks to valuations are now skewed to the upside. According to Glenmede's Global Expected Returns Model, valuations on U.S. large-cap equities sit at the 77th percentile - which implies 22% downside if valuations were to revert to fair value. "Recession beginning later this year or early next remains the base case, a likelihood which is not reflected in equity valuations," said Jason Pride, chief of investment strategy and research at Glenmede. After taking a break from tightening credit last month, Fed Chairman Jerome Powell and his colleagues look locked in to raising interest rates by a quarter percentage point this week. The big question facing policymakers and financial markets is what comes next, and a lot will depend on how much inflation the central bank is willing to accept, and for how long. "The market is pretty well signaling another 25-basis-point rate hike is in the cards," said George Mateyo, chief investment officer at Key Private Bank. "People are probably looking past the announcement itself and then trying to glean some read in terms of what happens later this year." Whether the Fed gives investors a reason to sell or there's a big earnings disappointment this week, the market is ripe for a decline into the fall, according to Paul Nolte at Murphy & Sylvest Wealth Management. "For now, that decline is not something to upset the longer-term trajectory of the market," he noted. Some of the main moves in markets:
Read more: postguam
