Earnings Barrage, Inflation, and GDP: Big Tech Reporting Week Starts with SPX on Six-Day Skid

(Monday market open) Wall Street enters the heart of earnings season reeling from fierce selling that sent the broader market to two-month lows late last week, chopping the 2024 rally in half. Tech and other growth sectors suffered most amid rising Treasury yields, geopolitical fireworks, and mixed earnings news, but there are signs of oversold conditions.

Mega-cap tech shares clawed back some of their losses in premarket trading Monday as major indexes turned green following overnight gains in Asia and Europe, but recent rallies haven’t made it to the closing bell.

“The new theme is failed rallies, as every move higher last week ran into selling,” said Alex Coffey, senior trading strategist at Schwab.

Treasury yields inched higher Monday and remained near five-month highs, offering no relief, but the dollar and crude oil eased.

For bullish investors, it’s likely a letdown to see the S&P 500® index (SPX) dip back below 5,000 or witness the Dow Jones Industrial Average® ($DJI) approach 40,000 and then retreat so dramatically. Both the SPX and the Nasdaq-100® (NDX) are on six-session losing streaks, and last week was the worst in more than a year for the SPX as formerly high-flying semiconductor shares fell back to Earth.

Keep in mind, though, that it’s normal for the market to spend weeks or even months consolidating gains. The 5% drop from all-time highs could represent a healthy pause for Wall Street, which hadn’t experienced a major pullback since last October. The 25% rally from then to late March took major indexes to historically high valuation levels above 20 on a price-to-earnings (P/E) basis for the SPX, which history suggests are tough to maintain as interest rates stay higher for longer.

Strong earnings, if they arrive, could help from a valuation standpoint. Earnings take center stage starting with Tesla (TSLA) tomorrow, followed by Microsoft (MSFT), Meta Platforms (META), and Alphabet (GOOGL) later this week.  Overall, about one-third of S&P 500 companies report this week.

Another helpful factor might be any sign of inflation progress, and the March Personal Consumption Expenditures (PCE) prices report, the Federal Reserve’s favored inflation metric, is due Friday.

Fed speakers are in their “silent period” ahead of next week’s Federal Open Market Committee (FOMC) meeting, which could ease some of last week’s rate-related volatility that accompanied more hawkish-sounding words from many, including Fed Chairman Jerome Powell himself.

“They’ve coalesced around this message of patience,” said Kathy Jones, chief fixed income strategist at Schwab, adding that the market is pricing in about one to two rate cuts in the second half of the year.

Futures based on the SPX were up 0.5% shortly before the close of overnight trading and futures based on the NDX rose 0.65%. Futures based on the $DJI climbed 0.6%. 

Morning rush

• The 10-year U.S. Treasury yield (TNX) climbed four basis points to 4.65%.
• The U.S. Dollar Index ($DXY) is steady at 106.11, near recent peaks.
• The Cboe Volatility Index® (VIX) fell moderately to 18.27 but remains near recent highs.
• WTI Crude Oil (/CL) fell 0.1% to $83.06, recovering from much steeper declines overnight.
• Bitcoin (BTC) rose 1.8% to $65,900.

Stocks in spotlight

As the second full week of earnings season opens, the blended growth rate, which tracks the very small percentage of companies that have already reported actual results blended with consensus estimates for companies that have yet to report, is near 2.9%. If this holds up, it would be the third straight quarterly earnings per share (EPS) gain for S&P 500 stocks, but there’s a long way to go.

“It’s too early to make a judgment as to whether we’ll end this season with a better-than-average beat rate and percent by which companies are beating,” said Liz Ann Sonders, chief investment strategist at Schwab. “But you are seeing, and maybe it’s because we’re just in a choppier market environment right now, that the stocks missing estimates are getting more severely punished relative to gains accrued by stocks that have beaten Wall Street’s estimates.”

Tech week underway: Tech earnings kick off later this week. Analysts have lofty expectations for EPS and revenue growth, with AI likely driving gains to some extent but cost-cutting another factor. Multiples for most of the mega caps galloped higher in Q1.

The usual metrics like cloud growth and internet ad sales loom large, but another question is how quickly customers adopted AI offerings from both Microsoft and Alphabet. AI began grabbing headlines a year ago, but market participants continue to monitor the real-world impact, looking for evidence that companies other than the chip makers can make steady money through this technology.

Semiconductors return as part of the earnings barrage, with Intel (INTC) and Texas Instruments (TXN) reporting. This could give investors another chance to learn of Intel’s progress bringing more chip manufacturing back to the United States. Advanced Micro Devices (AMD), the main AI competitor for Nvidia (NVDA), is expected to report next week after chip stocks took it on the chin in Friday’s steep sell-off.

Tesla reports Tuesday following a quarter most of the company’s investors would likely rather forget. On earnings day, investors will likely want to know much more about where the company’s stock value, product plans, and cost structure are heading as the EV space appears to be losing some of its luster. Expectations are low for Tesla going into its report, which could set up a situation where any good news, however small, receives a positive greeting from Wall Street.

Scorecard: Through the end of last week, with 14% of S&P 500 companies reporting results, 74% beat analysts’ average estimate for EPS and 58% exceeded Wall Street’s revenue expectations, according to research firm FactSet. Six sectors are reporting lower earnings today compared with March 31 due to negative EPS surprises and downward revisions to EPS estimates.

Stocks on the move:

• Tesla shares lost another 4% ahead of the open Monday and ahead of its earnings release Tuesday as Reuters reported the company has lowered the cost of some models by $2,000 and also has lowered the cost of full self-driving software by 33% in the United States. This likely puts margins back in focus going into earnings.
• Verizon (VZ) shares climbed 1.5% in premarket trading following an earnings report that showed subscriber losses smaller than Wall Street had expected. EPS was below year-ago levels but still better than analysts had expected, while operating revenue came in near Wall Street’s estimate. Verizon said its Q1 results position it for “growth and profitability throughout 2024,” and cited “strong wireless service revenue growth” along with “continued momentum in broadband.”
• Shares of arms makers Lockheed Martin (LMT), Northrop Grumman (NOC), and General Dynamics (GD) were steady but could be worth watching after the U.S. House of Representatives approved $95 billion in aid for Ukraine, Israel, and Taiwan. The Senate is expected to consider the bill this week followed by final passage next week, Reuters said. The aid includes funds for weapons and missile defense.

What to watch

Inflation ahead: Friday’s March PCE data come after hotter-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) reports already released for the month.

There’s some hope that PCE could be milder, in part due to fluctuations in PPI and also because it’s less shelter focused. CPI, which grabbed so much of the market’s (and the Fed’s) attention lately, has been inflated mainly by rising shelter and insurance costs.

Before PCE, investors get a glance Thursday at the government’s first estimate for Q1 gross domestic product (GDP). Market estimates have been climbing for weeks based on robust economic data, playing into expectations that the Fed could wait longer to cut rates. The Atlanta Fed’s GDPNow model now pegs GDP to grow at a seasonally adjusted annual rate of 2.9%, not much below the final Q4 reading of 3.4%.

Other U.S. reports to watch in coming days include durable goods and New Home Sales. The durable goods data could be a useful barometer of consumer trends to see if people are still buying large, expensive items when inflation and rates remain stubborn.

Friday in review:

Nvidia plunged 10% Friday to lead the chip sector lower, sending the PHLX Semiconductor Index (SOX) down 4.1% to a two-and-a-half-month low. Communication Services shares were also among the weakest sectors, fueled by Netflix (NFLX) weakness. There were several pockets of strength, however. Banking shares posted firm gains Friday behind stronger-than-expected quarterly results from some regional lenders. Utilities also advanced. 

The S&P 500 has fallen 5.5% from a record close March 28, more than halfway to the 10% threshold that’s traditionally viewed as a correction. The Nasdaq Composite® is down 7.1% from its April 11 record close.

The SPX recently carved below its 20-day and 50-day moving averages without finding much buying interest, finishing near intraday lows each of the last six sessions. The next support is the 4,850–4,860 area, which represents about a 50% retracement of the rally from October through March.

Eye on the Fed

Early today, futures traders place 98.3% chances of rates remaining unchanged at the FOMC’s April 30–May 1 meeting. Odds of a 25-basis point cut at the June meeting are around 19%, rising to roughly 42% for the late-July meeting, based on the CME FedWatch Tool. Those readings aren’t changed much from late last week. The market continues to price in 84% chances of at least one rate cut this year, and nearly 50% chances of two.

Sector watch: Read the latest on what’s new in stock sectors and corporate bonds in Schwab’s OnInvesting podcast featuring several Schwab market experts.

Thinking cap

Ideas to mull as you trade or invest

Talking technicals: “From a bullish perspective, we’re near-term technically oversold, and we’ve seen evidence of some panic selling with several former AI darlings (NVDA, SMCI, ARM, etc.) lower by 10%–20% on Friday alone, and therefore we may be setting up some type of a relief rally,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. On the other hand, the SPX has been closing at the lows of the day. “This speaks to where investors want to be at the end of the day—in stocks or out of them. Are we oversold near-term? Yes, as evidenced by the Relative Strength Indicator (RSI). Does this mean we will bounce early this week? Not necessarily, but it can indicate that a bounce is near.” Any rebound could hit resistance at the 50-day moving average of 5,118.

Back in your arms: After a slight decoupling earlier this year, U.S. equities and Treasuries enter this week as firmly tied as ever. The one-year correlation between equities and fixed income has reached the 95th percentile of the range since 2000. Briefing.com noted last Friday this makes stocks far more prone to move based on ups and downs of Treasury yields, as seen the last two weeks. It also makes life more difficult for investors with so-called “60–40” stock and fixed income portfolios.

Phone home: Telecommunications shares present a triple threat this week with earnings from Verizon, AT&T (T), and T-Mobile US (TMUS). As Barron’s noted recently, competition is rising across the industry as T-Mobile US continues to offer lower prices, and Verizon has won market share from AT&T. 5G network quality is another factor that could drive customers from one carrier to another. Verizon kicked it off this morning, with AT&T on Wednesday and T-Mobile expected Thursday. Energy gets in on the earnings action later this week, as well, with Exxon Mobil (XOM) and Chevron (CVX) on deck. Both report Friday, and their take on the Middle East situation and its impact on the industry could be illuminating.

Calendar

April 23: March New Home Sales and expected earnings from Freeport-McMoRan (FCX), Halliburton (HAL), Lockheed Martin (LMT), Kimberly-Clark (KMB), PepsiCo (PEP), Philip Morris (PM), Tesla (TSLA), Texas Instruments (TXN), and Visa (V).

April 24: March durable goods orders, and expected earnings from Meta Platforms (META), AT&T (T), Ford (F), Boeing (BA), IBM (IBM), Humana (HUM), and Waste Management (WM).

April 25: March Pending Home Sales, first Q1 GDP estimate, and expected earnings from Bristol-Myers Squibb (BMY), Merck (MRK), Union Pacific (UNP), Dow (DOW), Alphabet (GOOGL), Microsoft (MSFT), T-Mobile (TMUS), and Valero Energy (VLO).

April 26: March PCE Prices and March core PCE Prices, March Personal Income and Personal Spending, final University of Michigan April Consumer Sentiment, and expected earnings from AbbVie (ABBV), Chevron (CVX), Exxon Mobil (XOM), and Aon (AON).

April 29: Q1 Employment Cost Index, April Consumer Confidence, and expected earnings from Paramount Global (PARA).