This is going to be a big week for investors. Over 100 S&P 500 companies will report earnings, including 5 of the Magnificent 7. There is an FOMC meeting that concludes Wednesday that could alter expectations of the pace of future rate cuts. In addition, the Treasury Department will present its forward funding schedule. Finally, there will be a bevy of economic reports as we roll into February culminating in Friday’s employment report. It probably isn’t an understatement to say that the cumulative impact of this week’s news will set the tone for the equity markets over the coming weeks or even months.
Before looking ahead, let’s look back to Friday’s GDP report which showed growth continuing at a strong 3%+pace. Moreover, it appears that growth actually accelerated toward Christmas as consumer spending remained robust. Meanwhile inflationary pressures continue to recede with core readings moving down toward the targeted 2% range. The probability of a soft landing has increased.
Now let’s look ahead. I’ll start with earnings. Alphabet# and Microsoft# both report tomorrow after the close. For Microsoft, expectations are high. The company’s valuation now exceeds $3 trillion. Are they too high? How the market reacts will tell us whether there is a ceiling to the hope and hype associated with cloud computing and AI. At Alphabet, it’s all about the pace of growth for digital advertising, it’s role in AI and cloud computing, plus any commentary of antitrust actions in the U.S. and Europe. On Thursday, after the close, we hear from Apple#, Meta Platforms#, and Amazon#. As for Apple, the tale is a bit different. Phone sales have been sluggish for some time. No one expects them to suddenly surge. What is key for Apple is the recurring revenue to be achieved from selling additional services to its loyal base. Investors will also be looking for a roadmap to future products and services. It’s Apple Vision headsets come to market later this week. Meta and Amazon will be dependent on the pace of digital advertising like Alphabet. At all three companies, the path for margins will also be key. All are trying to be more restrained on expenses than they have in the past. As always, it’s the matching of results to expectations that matters. All five have histories of volatile price action following earnings reports. This week could burst some bubbles or expand them further.
Now to the Fed. No one expects any change in rates this week. Markets are looking for 5-6 rate cuts this year while the Fed’s most recent statements assume just three. Markets were looking for as many as 7 just a month or two ago. I expect the Fed to continue to state a preference to take a slow path toward rate reduction. It has a dual mandate to maintain both full employment and price stability. Inflation is moving in the right direction toward the Fed’s 2% target. Moreover, growth of over 3% and average employment growth close to 200,000 per month suggests no current need to adjust policy. If anything, the Fed will worry that the current pace of growth is still a big too strong. Lowering rates soon would only serve to accelerate growth and possibly reignite inflation. Thus, while acknowledging market predictions/hope, I think the Fed will continue to suggest a deliberate pace of rate cuts lies ahead. That doesn’t mean markets will adjust from a prediction of 5-6 cuts back to 3, but adjusting to 4-5 could create a bit of a headwind. With that said, the real rate that matters most to equity investors is the 10-year Treasury yield. After briefly sliding below 4%, it’s back to 4.10%. If growth and inflation are set to move forward at a pace close to 2% over the longer term, there isn’t much reason for the 10-year yield to move far from where it is today. Unless or until growth falls meaningfully, the likelihood that it drops meaningfully, say to 3.5% or less, is small. However, if growth continues to surprise to the upside, as it has for all of 2023, there is a reasonable chance the 10-year yield could rise toward 4.5% or even a bit higher. These are all ifs. For now, the 10-year yield’s influence on markets seems more muted than it was throughout much of 2023.
Finally, I want to turn to Treasury’s funding schedule. If you recall in the early fall, markets became very concerned that the ability of markets to absorb all the debt Treasury had to issue to fund rising deficits, plus the Fed’s QT program of reducing its balance sheet at a $1 trillion pace was pushing rates to multi-year highs. Then, in early November, Treasury shifted direction and set out a forward schedule that skewed most funding toward short-term maturities. That relieved pressure on 10-year yields and sent stocks soaring. Will it alter that balance Wednesday? Markets will watch and react. Indeed, the forward funding schedule may be the most important news event this week.
Normally, the monthly employment report takes center stage. Unless it shows growth of less than 100,000 or more than 300,000 that isn’t likely this time. There are few indications that the labor market is changing course now. Indeed, any outlier number will be looked at suspiciously.
Thus, by the end of this week, we will have a much clearer picture of future direction. The earnings reports of the big 5 will set part of the tone. Fed commentary surrounding the pace of future rate cuts will be important but it will be the schedule of pending Treasury funding that may prove to be the biggest event. Stay tuned.
Today Oprah Winfrey is 70. Tom Selleck turns 79.
James M. Meyer, CFA 610-260-2220