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The stock market rally is at its most fragile state in recent months, ahead of Wall Street’s busiest week of summer.
The S&P 500 (GSPC) and Nasdaq Composite (^IXIC) recently suffered their worst one-day declines since 2022 as the indexes struggled to recoup losses during a rally on Friday. All three major averages ended the last full week of July lower. The S&P 500 fell more than 1%, while the Nasdaq fell more than 2.3%. Meanwhile, the Dow Jones Industrial Average (DJI) rose about 0.6%.
Over the next week, a Federal Reserve meeting, the July jobs report and earnings from major tech giants Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) and Meta (META) will determine the direction of the markets. August.
Updates on vacancies, activity in the service and manufacturing sectors and consumer confidence are also on the calendar.
A busy week of corporate earnings awaits, with 171 members of the S&P 500 expected to report quarterly results. AMD (AMD), Arm (ARM), Boeing (BA), McDonald’s (MCD) and Starbucks (SBUX) will be among the companies highlighting the scheme.
A September signal
The Fed will announce its final monetary policy decision next Wednesday. Markets largely expect the central bank to keep interest rates steady at its July meeting.
However, recent developments in the economy have investors looking forward to the Fed’s first rate cut. In June, the core Personal Consumption Expenditures (PCE) index, which excludes food and energy costs and is closely watched by the Federal Reserve, rose 2.6% from the previous year, the lowest annual increase in more than three years. Separate data for the month showed a significant decline in another inflation measure, the consumer price index (CPI).
Meanwhile, the labor market is showing signs of cooling down. The ratio of vacancies to unemployed people has returned to pre-pandemic levels, and last month the unemployment rate reached its highest level since November 2021.
This has prompted markets to price in the Fed’s first rate cut in September, and investors will be eagerly listening to Jerome Powell’s press conference on Wednesday for some confirmation.
“The overall tone of the meeting, including that of Chairman Powell’s press conference, should signal that a September rate cut is a reasonable starting point without committing to this action in advance,” wrote Deutsche Bank Chief U.S. Economist Matthew Luzzetti in a letter to his customers.
Labor market view
Friday will bring a fresh look at monthly job growth, as economists continue to debate whether the recent slowdown in the labor market represents normalization or a more significant deterioration.
The July jobs report is expected to show 175,000 nonfarm payroll jobs added to the U.S. economy, with unemployment holding steady at 4.1%, according to Bloomberg data. In June, the US economy added 206,000 jobs, while the unemployment rate rose to 4.1%.
“The 180,000 payroll increase we expect in July would still be a respectable gain, but would underscore that the labor market is deteriorating in some direction,” Wells Fargo’s economics team led by Jay Bryson wrote in a weekly note to customers. “A range of measures, including the unemployment rate, the layoff rate, the number of temporary workers and small business hiring plans, mean that the labor market is not only softer than a year or two ago, but also weaker compared to where it was before the pandemic. “
Against this background, particular attention will be paid to whether unemployment remains stable or continues to rise, as has been the case over the past three months.
Big Tech on deck
The recent stock market slump has led to a major tech sell-off.
As of July 10, Roundhill’s Magnificent Seven ETF (MAGS) – which tracks Nvidia (NVDA), Apple (AAPL), Alphabet (GOOGL, GOOG), Amazon (AMZN), Meta (META), Microsoft (MSFT) and Tesla (TSLA) ) – is down about 12%.
Truist co-chief investment officer Keith Lerner recently told Yahoo Finance that the pullback makes sense given the rise in Big Tech stocks over the past year and overextended positioning in many of the big tech stocks. This, combined with investors moving into less favored areas of the market rally that could benefit from the Fed’s rate cut, has become the hallmark of the market action over the past two weeks.
Gains from four of the Magnificent Seven technology stocks – Amazon, Meta, Microsoft and Apple – could change that. But as the sell-off following Alphabet and Tesla earnings last week showed, it’s been a tough season to wow investors with gains.
“Looking at the gains we’ve seen this past week, I don’t think the gains are bad,” Lerner said. “I don’t think the companies, the fundamental business trends, are bad, but I just don’t think they were good enough compared to these really high [expectations].”
And, to Lerner’s point, stocks that miss Wall Street estimates for earnings, revenue or both see significantly worse price reactions the next trading day than have been typical over the past five years, according to research from Evercore ISI’s Julian Emanuel.
For now, Emanuel wrote in a note to clients, “earnings remain a catalyst for volatility, not higher S&P 500 prices.”
Weekly calendar
Monday
Economic data: Dallas Fed Manufacturing Activity, July (-14.2 expected, -15.1 prior)
Income: McDonald’s (MCD), Philips (PHG), Tilray (TLRY)
Tuesday
Economic data: S&P CoreLogic 20-city year-over-year NSA, May (7.2% prior); Conference Board Consumer Confidence, July (99.7 expected, 100.4 prior) JOLTS Jobs, June (8.14 million prior); Dallas Fed Services Activity, (-4.1 prior)
Income: Microsoft (MSFT), Advanced Micro Devices (AMD), BP (BP), Caesars Entertainment (CZR), Electronic Arts (EA), First Solar (FSLR), JetBlue (JBLU), Marathon Petroleum Corporation (MPC), Merck (MRK) ), Pinterest (PINS), Pfizer (PFE), Procter & Gamble (PG), Starbucks (SBUX), SoFi (SOFI)
Wednesday
Economic data: MBA mortgage applications, week ending July 26 (-2.2% prior); ADP private payrolls, July (+168,000 expected, +150,000 earlier); Minnesota Chicago PMI, July (44.0 expected, 47.4 prior); Labor cost index, second quarter (1.0% expected, 1.2% earlier); Federal Reserve monetary policy decision (no interest rate change expected)
Income: Meta (META), Altria (MO), Arm (ARM), Boeing (BA), Carvana (CVNA), Generac (GNRC), Humana (HUM), The Kraft Heinz Company (KHC), Mastercard (MA), Norwegian Cruise Lines (NCLH), Paycom (PAYC), Qualcomm (QCOM)
Thursday
Economic data: Job cuts at Challenger, year-on-year, July (+19.8% prior); Unit labor costs, second quarter (+4% prior); Non-farm productivity, fourth quarter (+1.6% expected, +5.2% prior); Initial unemployment claims, week ending July 27 (235,000 previously); S&P Global US manufacturing PMI, July final (49.5 prior); Construction spending, month-on-month, July (+0.2% expected, -0.1% prior); ISM production, July (49 expected, 48.5 prior); ISM prices paid, July (52.1 earlier)
Income: Apple (AAPL), Amazon (AMZN), Block (SQ), Booking Holdings (BKNG), Canada Goose (GOOS), Coinbase (COIN), ConocoPhillips (COP), Crocs (CROX), DraftKings (DKNG), Marathon Digital Holdings (MARA), Mobileye (MBLY), Moderna (MRNA), Roku (ROKU) SiriusXM (SIRI), Wayfair (W)
Friday
Economic calendar: Nonfarm payrolls, July (+175,000 expected, +206,000 prior); Unemployment rate, January (4.1% expected, 4.1% earlier); Average hourly wage, month-on-month, July (+0.3% expected, +0.3% prior); Average hourly wage, year-over-year, July (+3.7% expected, +3.9% prior); Average hours worked per week, July (34.4 expected, 34.3 previously); Labor force participation rate, July (62.6% previously); Factory orders, June (+0.5% expected, -0.5% earlier); Durable goods orders finalized in June (-6.6% earlier)
Income: Chevron (CVX), Exxon Mobil (XOM)