Source: Zhitong Finance

The US stock market is at its weakest point in months.$S&P 500 Index (.SPX.US)$It closed below 5,000 points last Friday, the first time since the end of February. At the same time,$Nasdaq Composite Index (.IXIC.US)$It fell more than 5% last week, while$Dow Jones Industrial Average (.DJI.US)$It remains flat. This week, key data on economic growth and inflation, as well as the announcement of the results of big tech companies, will determine whether this sluggishness will continue.

In terms of economic data, the preliminary value of the US GDP growth rate for the first quarter will be announced on Thursday, and the US Personal Consumption Expenditure Index (PCE) for March will be announced on Friday. In terms of corporate news, about 178 S&P 500 companies will announce their results this week. The market capitalization of these companies accounts for more than 40% of the total market value of the index. However, the biggest expectations still come from large technology companies, among the “Big Seven Tech Companies” in US stocks$Tesla (TSLA.US)$,$Meta Platforms (META.US)$,$Microsoft (MSFT.US)$,$Alphabet-A (GOOGL.US)$/$Alphabet-C (GOOG.US)$They will all release financial reports next week.

This week will affect the upward trend in US bond yields

Investors will pay close attention to this week's economic data to see how it may change the upward trend in bond yields. The rise in bond yields is once again becoming a pain point for investors. On Tuesday, 2-year US Treasury yields surged to 5%, the first time since the stock market last bottomed out in October 2023. Federal Reserve Chairman Powell said last week that the target for the inflation rate to fall to 2% would take “longer than expected.”

Emanuel believes this will be a key pain point for the stock market, just like when the market sold off last fall. Emanuel said, “The reason that is probably more worrying now is that the market traded on the Federal Reserve's implicit promise to cut interest rates three times. If you look back at the situation in March, I think this is not just a form of confidence; the market is falling from a high point, but just at the moment when the market began digesting interest rate cuts that were less than promised three times.”

Because of this, Emanuel warns, it may be time to take defensive measures in the market. He recommended investing in industries such as healthcare and consumer goods, while also pointing out that holding cash in money market accounts can earn about 5% of returns, which is still a viable part of the investment portfolio.

The inflation index favored by the Federal Reserve may highlight the stickiness of inflation

Unstable inflation data over the past few months forced investors to lower their expectations that the Federal Reserve would cut interest rates this year. Chicago Federal Reserve Chairman Goulsby said on Friday that “progress on inflation has stalled,” and pointed out that it is “reasonable” for the central bank to wait for the inflation trend to become more clear. This made Friday's PCE price index even more critical.

Economists expect that as energy costs rise, the overall PCE price index rose 2.6% year on year in March; the “core” PCE price index rose 2.7% year on year in March, lower than the 2.8% annual growth rate in February. Economists expect the “core” PCE price index to rise 0.3% month-on-month, in line with last month's changes.

Citibank economist Andrew Hollenhorst wrote in an April 17 report to clients: “If the core PCE inflation rate (month-on-month) reaches around 0.25% in March and April, then the year-on-year increase will drop from 2.8% to 2.6%, which will give the Fed a reason to 'gradually' adjust policy interest rates starting in June or July.”

Although the core PCE price index may not be as strong as the March Consumer Price Index (CPI) announced earlier, Federal Reserve Chairman Powell and other officials have stated that before interest rates are cut, it will take longer for them to gain the necessary confidence in the downward trajectory of inflation. The consumer price index surpassed expectations earlier this month, making the market uneasy.

This means that Federal Reserve officials seem to be about to receive further confirmation that progress in the fight against inflation has stalled, which seems to support a shift in the Fed's tone, which is to keep interest rates high for a longer period than previously anticipated.

US economic growth is expected to remain resilient

The latest inflation data to be released on Friday will be accompanied by personal spending and income data for March. In the context of healthy employment growth, economists expect household spending on goods and services to grow strongly again, and income growth will accelerate.

Investors are generally at ease with the repricing of the Fed's interest rate cut, partly because the economic background is becoming more and more positive. Throughout the first quarter, economists have been improving their forecasts for economic growth. Economists expect the US economy to grow at an annualized rate of 2.5% in the first quarter, down from 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 increase of 4.2% in the second half of 2023, real GDP growth in the first quarter is likely to fall to around 2.7%. According to FOMC forecasts, this is still above the long-term sustainable growth rate of 1.8%, indicating continued inflationary pressure. Looking ahead, economic activity will be challenged by weak discretionary spending, and consumers are becoming more sensitive to prices in the face of increased inflation.”

Bank of America economist Michael Gapen wrote in a report to clients on Friday: “The upcoming data continues to show that the economy remains resilient in an environment of rising interest rates. Consumers continue to be strong. Since the ultra-high growth rate of 4.9% in the third quarter, the economy has cooled down moderately, but the cooling process has been gradual.”

Financial reports may be difficult to boost the market

Considering the sharp rise in stock prices of some of the darling markets this year, optimistic expectations have been digested, then even better-than-expected earnings may not have an impact on the stock market. Julian Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI, said: “Around this earnings season, the wider market experienced digestion issues.”

Previously, the day after the 65 S&P 500 stock companies announced their quarterly results, the stock market's reaction was generally the same. Emanuel's research shows that stocks higher than Wall Street's expectations rose 0.8% on the next trading day, slightly lower than the 0.9% average increase over the past few years.

Meanwhile, companies with disappointing revenue and profits have been hit harder than normal, with stock prices falling by an average of 5.8% in the next trading session, compared to a typical decline of 3.1% over the past five years. “Considering that [the S&P 500] is overvalued, even good news may not be good news, especially for companies that have made it this far,” Emanuel said.

Since the published earnings report did not satisfy investors, the baton will be passed on to one of the strongest performing sectors in the market over the past year: large technology companies. Despite last week's chipmakers and$Netflix (NFLX.US)$The performance was disappointing, leading to a sell-off in technology stocks, but expectations for profit growth in Meta, Microsoft, and Alphabet are still very high. All three companies will release financial reports in the coming week. FactSet stated on Friday that it is expected that these companies, as well as$NVIDIA (NVDA.US)$und$Amazon (AMZN.US)$Earnings for the first quarter of this year will increase by 64.3%. Earnings for 495 other companies are expected to drop 6%.