Stocks retreated from record highs amid pressure on the technology sector after a global technology outage sent shockwaves through the market on Friday.
The S&P 500 Index (GSPC) ended the week down nearly 2% while the Nasdaq Composite (IXIC) fell more than 3.5% for the week. Both indices posted their worst weekly performance since April. Meanwhile, the Dow Jones Industrial Average (DJI) gained about 0.7%.
This week, critical readings on economic growth and inflation, as well as the start of earnings from major technology companies, will determine whether the malaise persists.
Investors will also have to digest the news that President Joe Biden will no longer seek re-election. Biden announced his withdrawal from the presidential race in a message released Sunday.
On the economic data front, the advance reading of second-quarter economic growth is due on Thursday, followed by the June reading of the personal consumption expenditures index, the Fed’s preferred inflation gauge, on Friday.
On the corporate front, a slew of S&P 500 companies are set to report quarterly results in a week, led by Alphabet (GOOGL, GOOG), Tesla (TSLA) and Chipotle (CMG).
Inflation outlook
Last week, new data showing slowing inflation prompted markets to price in a 100% chance that the Federal Reserve will cut rates by the end of its September meeting.
The coming week will bring another look at inflation, this time with the Fed’s favorite gauge: the personal consumption expenditures (PCE) index.
Economists expect core PCE to rise 2.5% in June from a year earlier, compared with a 2.6% annual increase in May. Compared with the previous month, economists expect core PCE to rise 0.2%, slightly higher than the 0.1% increase in May.
The release comes less than a week before the Fed’s next monetary policy decision on July 31. Markets widely expect the central bank to keep interest rates unchanged.
Growth Check
One of the key questions on investors’ minds is whether the economy can remain resilient while rates remain at their most restrictive levels in more than two decades.
On Thursday, the first figures for the gross domestic product (GDP) for the second quarter will be released. Economists expect the U.S. economy to have grown at an annualized pace of 1.9% in the second quarter, up from 1.4% in the first quarter.
Michael Gapen, chief economics officer at Bank of America Securities, summed up expectations for the coming week’s data release in a weekly note, writing: “The data should show healthy activity and that inflation is moving in the right direction.”
Signs of a rotation
As investors have become more optimistic about the likelihood of multiple interest rate cuts this year, a shift has taken place in the stock market.
Over the past 10 days, Real Estate (XLRE) and Financials (XLF) have been the biggest contributors to sector action. Meanwhile, the market’s biggest winners over the past year, Technology (XLK) and Communication Services (XLC), have recently been the worst-performing sectors in the S&P 500.
And the rotation has finally trickled down to capitalization size, with small caps joining the 2024 stock market rally.
The small-cap Russell 2000 Index (^RUT) is up about 8% over the past month, while the S&P 500 is up less than 1% over the same period, sparking debate over whether this small-cap outperformance can continue.
“We believe there is room for the rotation to lower quality to persist if rate cuts remain priced in and Trump 2.0 trading continues ahead of the U.S. election,” Maxwell Grinacoff, U.S. equity derivatives strategist at UBS Investment Bank, wrote in a note to clients on Thursday.
Big Tech Companies’ Earnings Expected
As big tech companies stumble amid the market rotation, the fundamental story behind some of the stock market’s biggest names will be in focus in the week ahead.
Tesla and Alphabet are set to report earnings Tuesday after the close. Second-quarter results from both members of the Magnificent Seven will provide an early glimpse into investor appetite for the hottest stock of 2023. Both stocks have posted double-digit gains over the past six months despite the recent selloff.
The question is whether the AI-powered upward trajectory can continue.
“The biggest risk going into the next six to eight weeks is, are we setting ourselves up for an AI (earnings) disappointment?” Ryan Grabinski, managing director of investment strategy at Strategas Research Partners, told Yahoo Finance. “Are all the AI deals finally going to start unwinding?”
The performance of the big tech companies will likely determine the earnings growth trajectory of the entire S&P 500. According to John Butters, senior earnings analyst at FactSet, four companies (Alphabet, Nvidia (NVDA), Meta (META) and Amazon (AMZN)) are expected to see earnings rise 56.4% from the same period last year. The other 496 are expected to see earnings rise just 5.7%.
Combining the two groups, the S&P is currently on track to produce year-over-year earnings growth of 9.7%. That would be the best quarter of earnings growth since the fourth quarter of 2021.
Weekly calendar
Monday
Economic data : Chicago Fed National Activity Index, June (-0.06 expected, +0.18 previously)
Earnings: Cleveland Cliffs (CLF), Nucor (NUE), SAP (SAP), Truist (TFC), Verizon (VZ), Zions Bancorporation (ZION)
Tuesday
Economic data : Richmond Fed Manufacturing Index, July (-7 expected, -10 previously); Month-over-Month Existing Home Sales, June (-2.7% expected, -0.7% previously)
Earnings: Alphabet (GOOG, GOOGL), Cal-Maine Foods (CALM), Capital One (COF), Comcast (CMCSA), Enphase (ENPH), Freeport-McMoRan (FCX), GE Aerospace (GE), General Motors (GM), Lockheed Martin (LMT), Phillip Morris International (PM), Spotify (SPOT), Tesla (TSLA), UPS (UPS), Texas Instruments (TXN), Visa (V)
Wednesday
Economic data : MBA Mortgage Applications, Week Ending July 19 (+3.9% previously); S&P Global US Manufacturing PMI, July, Preliminary (51.4 expected, 51.6 previously); S&P Global US Services PMI, July, Preliminary (55 expected, 55.3 previously); S&P Global US Composite PMI, July, Preliminary (54.8 previously); New Home Sales, Month-over-Month, June (+3.8% expected, -11.3% previously)
Earnings: AT&T (T), Chipotle (CMG), Ford (F), IBM (IBM), General Dynamics (GD), Lamb Weston (LW), Las Vegas Sands (LVS), ServiceNow (NOW), Viking Therapeutics (VKTX), Waste Management (WM), Whirlpool (WHR)
THURSDAY
Economic data : Second-quarter GDP, advance estimate (+1.9% annualized rate expected, +1.4% previously); First-quarter personal consumption, advance estimate (+1.7% expected, 1.5% previously); Initial jobless claims, week ended July 20 (243,000 previously); Durable goods, June, advance estimate (+0.5% expected, +0.1% previously)
Earnings: American Airlines (AAL), AstraZeneca (AZN), Boston Beer (SAM), Deckers (DECK), Hasbro (HAS), Honeywell (HON), Juniper Networks (JNPR), Keurig Dr. Pepper (KDP), New York Community Bancorp (NYCB), RTX (RTX), Skechers (SKX), Southwest (LUV), Texas Roadhouse (TXRH), Valero (VLO)
Friday
Economic data : Personal Income, Month-over-Month, June (+0.4% expected, +0.5% previously); Personal Spending, Month-over-Month, June (+0.3% expected, +0.2% previously); PCE Inflation, Month-over-Month, June (+0.1% expected, 0% previously); PCE Inflation, YoY, June (+2.5% expected, +2.6% previously); “Core” PCE, Month-over-Month, June (+0.2% expected, +0.1% previously); “Core” PCE, YoY, June (+2.5% expected; +2.6% previously); University of Michigan Consumer Sentiment, July, Final Reading (66.3 expected, 66 previously)
Earnings: 3M (MMM), Bristol Myers Squibb (BMY), Colgate-Palmolive (CL), Charter Communications (CHTR)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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