Will the US stock market be saved this week? The Federal Reserve's "favorite" inflation indicator, and the financial reports of tech giants are coming

The U.S. stock market is currently at its most fragile moment in months. The S&P 500 index closed below 5000 points last Friday for the first time since the end of February. Meanwhile, the Nasdaq Composite Index fell by over 5% last week, while the Dow Jones Index remained flat. This week, key data on economic growth and inflation, as well as the earnings reports of major tech companies, will determine whether this sluggishness will continue.

In terms of economic data, the initial estimate of U.S. first-quarter GDP growth rate will be released on Thursday, and the U.S. Personal Consumption Expenditures (PCE) Index for March will be released on Friday. In terms of corporate news, approximately 178 S&P 500 index component companies will report earnings this week, with these companies accounting for over 40% of the total market capitalization of the index. However, the biggest expectations are from the major tech companies, including Tesla (TSLA.US), Meta (META.US), Microsoft (MSFT.US), and Google's parent company Alphabet (GOOGL.US), which will all report earnings next week.

This week will impact the rising trend of U.S. bond yields

Investors will closely monitor this week's economic data to see how it may change the trend of rising bond yields. The rise in bond yields has once again become a pain point for investors. Last Tuesday, the yield on the 2-year U.S. Treasury bond surged to 5%, reaching this level for the first time since the recent market bottom in October 2023. Federal Reserve Chairman Powell stated last week that achieving the target inflation rate of 2% may take "longer than expected."

Emanuel believes that this will be a key pain point for the stock market, similar to the market sell-off last autumn. Emanuel said, "What may be more concerning at the moment is that the market has been trading on the implicit promise of three Fed rate cuts. If you look back at March, I think it was not just a confidence, the market coming off highs, but it was actually at the moment the market began to digest the fact that the rate cuts were less than three."

Emanuel warned that now might be the time to take defensive measures in the market. He suggested investing in industries such as healthcare and consumer staples, while also pointing out that holding cash in money market accounts can earn around 5% returns, which is still a viable part of a portfolio.

Fed's favored inflation gauge may highlight inflation stickiness

Unstable inflation data in recent months has led investors to lower their expectations for Fed rate cuts this year. Chicago Fed President Evans stated last Friday that "progress on inflation has stalled," and noted that it is "reasonable" for the central bank to wait for a clearer trend in inflation. This makes Friday's PCE Price Index even more crucial Economists expect that with the rise in energy costs, the overall PCE price index in March rose by 2.6% year-on-year; the "core" PCE price index in March increased by 2.7% year-on-year, lower than the 2.8% annual growth rate in February. Economists predict that the "core" PCE price index will increase by 0.3% month-on-month, consistent with the change from the previous month.

Citigroup economist Andrew Hollenhorst wrote in a report to clients on April 17th: "If the core PCE inflation rate (month-on-month) reaches around 0.25% in March and April, the year-on-year growth rate will decrease from 2.8% to 2.6%, which will give the Federal Reserve a reason to 'gradually' adjust policy rates starting in June or July."

Although the core PCE price index may not be as strong as the CPI released earlier in March, Federal Reserve Chairman Powell and other officials have indicated that they need more time to gain confidence in the downward trajectory of inflation before cutting rates. The Consumer Price Index exceeded expectations earlier this month, causing unease in the market.

This suggests that Federal Reserve officials seem poised to receive further confirmation that progress against inflation has stalled, which seems to support a shift in the Fed's stance to maintaining rates at high levels for longer than previously expected.

Resilience Expected in US Economic Growth

The latest inflation data to be released on Friday will be accompanied by personal spending and income data for March. Against a backdrop of healthy job growth, economists expect strong growth in household spending on goods and services, with income growth also expected to accelerate.

Investors have largely remained calm in repricing Fed rate cuts, partly due to an increasingly positive economic backdrop. Economists have been raising their forecasts for economic growth throughout the first quarter. Economists expect the annualized growth rate of the US economy in the first quarter to be 2.5%, lower than the 3.4% in the fourth quarter of 2023, but still higher than the potential growth rate of 1.8%.

Bloomberg economists wrote: "Following an average growth of 4.2% in the second half of 2023, actual GDP growth in the first quarter may fall to around 2.7%. According to the Federal Open Market Committee's forecast, this is still above the long-term sustainable growth rate of 1.8%, indicating that inflation pressures persist. Looking ahead, economic activity will face challenges from soft discretionary spending, with consumers becoming increasingly sensitive to prices amid worsening inflation." "

In a report to clients last Friday, Michael Gapen, an economist at Bank of America, wrote: "The upcoming data continues to indicate that the economy remains resilient in the face of rising interest rates. Consumers continue to remain strong. Since the super high growth rate of 4.9% in the third quarter, the economy has cooled moderately, but the cooling process is gradual."

Financial reports may not boost the market

Considering the significant rise in stock prices of some market darlings this year, optimistic expectations have already been factored in, so even better-than-expected earnings may not have an impact on the stock market. Julian Emanuel, head of stock, derivatives, and quantitative strategies at Evercore ISI, said: "The broader market has encountered digestion issues around this earnings season."

Previously, after 65 S&P 500 index component companies announced quarterly results, the market's reaction has been generally similar. Emanuel's research shows that stocks beating Wall Street expectations rose by 0.8% on the next trading day, slightly lower than the average increase of 0.9% in recent years.

At the same time, companies with disappointing revenue and profits face a greater impact than usual, with stock prices averaging a 5.8% decline in the next trading period, compared to the usual 3.1% decline over the past five years. Emanuel said: "Considering the overvaluation of the S&P 500, even good news may not be good news, especially for companies that have come this far."

As published earnings reports fail to satisfy investors, the baton will be passed to one of the strongest performing sectors in the market over the past year: large tech companies. Despite disappointing performances from chipmakers and Netflix (NFLX.US) last week leading to a tech sell-off, expectations for profit growth remain high for Meta, Microsoft, and Alphabet, all of which will release earnings in the coming week. FactSet noted last Friday that these companies, along with Nvidia (NVDA.US) and Amazon (AMZN.US), are expected to see a 64.3% increase in earnings for the first quarter of this year. Earnings for the other 495 companies are expected to decline by 6%.

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