Key Takeaways
- S&P 500 Hits Record High As Fed’s Rate Cut Sparks Market Rally
- Upcoming Economic Data, Especially PCE, May Test Market’s Reaction To Future Rate Cut Projections
- Strong Market Momentum Continues, But Dropping Earnings Expectations Signal Potential Caution Ahead For Investors
Stocks ended last week higher with the S&P 500 and Nasdaq Composite both higher by around 1.5%. For the S&P 500, it was a record closing high. But the big winners for the week were small cap stocks. The Russell 2000 gained 2.3% and although it didn’t set a new closing high, it is within striking distance.
Last week’s catalyst was the decision by the Federal Reserve Open Market Committe (FOMC) to cut interest rates by fifty basis points. That decision was greeted with a massive rally Thursday, but as I discussed in my column last Friday, history has not been kind to cuts of that magnitude to kick off a rate easing cycle. It’s kind of like eating a great meal and then realizing you were allergic to half the ingredients. History notwithstanding, I also think the Fed’s projection of two additional rate cuts this year could result in markets being increasingly sensitive to any economic data. We’ll get a chance to put that theory to the test this week.
On the economic calendar this week we have members of the Fed speaking every day. In addition, this morning we’ll get the latest reads on both the Manufacturing and Services Purchasing Manager’s Index (PMI). While more economic reports are scheduled throughout the week, the most important report comes on Friday. That is when the latest Personal Consumption Expenditures (PCE) data will be released. I’m particularly interested in this report because of what I mentioned above, the Fed’s interest rate projections.
If Friday’s PCE report is in line with or even lower than forecasts, then the projections for additional rate cuts make sense. If, however, the report comes in hot, then I think it could invite skepticism about those cuts. That is why I think markets have the potential to be increasingly sensitive to economic data.
One of the more encouraging aspects of late has been the number of stocks showing strength. Over 75% of stocks in the S&P 500 are trading above both their 50-day and 200-day moving average. But there are also reasons for caution. According to FactSet, earnings in the third quarter are expected to be higher by 4.6% on a year-over-year basis. That number is down from the end of June when it was forecast that earnings would be up 7.8%. That is a pretty significant drop in expectations, especially when considering the 12-month forward-looking price-to-earnings ratio is 21.4, which is well above its historical average.
There are some individual stocks I’ll be watching this week, starting off with Intel. According to The Wall Street Journal and Bloomberg, there are rumors Qualcomm could be interested in buying Intel or that Apollo Global Management could make an investment of up to $5 billion in the beleaguered company. Once the leading company in the chip space, Intel shares are down some 60% this year. While any takeover is likely to invite regulatory scrutiny, U.S. regulators may also see it as a way to shore up U.S. dominance in a hotly contested space.
I’m also keeping an eye on a few companies scheduled to report earnings this week, including KB Homes, Micron, CarMax and Costco. With respect to KB Homes and CarMax, I am curious in how the lower interest rates might impact their outlook. Micron is of interest because of continued interest in Artificial Intelligence. Finally, Costco’s earnings may offer insight into how consumers are spending money.
For today, while Friday’s close wasn’t what I’d call spectacular, let’s see if markets can build on the momentum from last week overall. With the S&P 500 having hit new highs, I’d like to also see the Nasdaq and Russell follow through. A few specific stocks worth mentioning include Palantir. That stock was downgraded to neutral by an analyst at Citi. Shares of Palantir have been on a tear since it was announced they would be joining the S&P 500. I’m also interested to see how shares of Amazon react to the news employees are being told to return to the office five days a week. I’m specifically wondering if the trend of bringing people back in the office impacts online shopping trends. I’m also closely watching to see if there is any reaction to this morning’s PMI reports. Then finally, I’m watching both gold and silver. Gold has broken out to all-time new highs, and I’ll be interested to see if silver can follow suit. As always, I would stick with your investing plans and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.