Fed's Next Rate Move Just One Highlight with Apple Earnings, More Jobs Data Ahead

Stocks face a pivotal week with an FOMC meeting, Apple earnings, and a jobs report. Some of the other household names we'll hear from in coming days include Uber, Starbucks, and Ford. A rate hike seems highly likely, but investors will want to hear what the Fed thinks is next.

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Key Takeaways

  • FOMC meeting highlights a jam-packed week that also includes Apple earnings, jobs report

  • First Republic to be acquired by JPMorgan Chase, putting banks back in focus ahead of FOMC meeting

  • Volatility remains near 17-month lows, but credit tightening signals possible static ahead

Alex Coffey, Senior Trading Strategist, TD Ameritrade

(Monday market open) Investors have their pick of news this week, with Apple (AAPL) reporting on Thursday just a day after another interest rate decision by the Federal Open Market Committee (FOMC) and a day before the April jobs report.

There’s not much mystery associated with the FOMC this time, as the market’s baked in about a 90% chance of another 25-basis-point rate hike. What comes after that for rates is where the real drama lies.

April ended up mixed for the market, with small-cap stocks falling about 2% but the S&P 500® index (SPX) rising about 2%.

Morning rush

  • The 10-year Treasury note yield (TNX) rose 2 basis points to 3.47%.
  • The U.S. Dollar Index ($DXY) is a bit lower at 101.69.
  • The Cboe Volatility Index® (VIX) futures are at 16.36.
  • WTI Crude Oil (/CL) fell to $75.11 per barrel.

The VIX is at its lowest level since late 2021, which could indicate a “risk-on” sentiment in the market. The equity market is acting as if all is well. But if you look at the inverted yield curves, assets and liabilities at commercial banks, the risk from commercial real estate, and lack of loan growth, credit tightening appears to be taking place.

Just in

The big weekend news concerns First Republic Bank (FRC). U.S. regulators announced JPMorgan Chase (JPM) will acquire FRC, and shares in the troubled lender tumbled over 40% in premarket trading, while JPMorgan shares rose. JPMorgan will take over the bank’s assets, including about $173 billion of loans and $30 billion of securities, as well as $92 billion in deposits.

This puts banks back at center stage just as the FOMC prepares to meet. Expect the Fed to give reassurance, but bank failings could be more a symptom of the problem than the problem itself. Three banks have now gone under this year. But the equity markets aren’t reflecting the kind of anxiety one might expect in such an environment.

Earnings update: Through the end of last week, earnings have been better than expected. The Q1 earnings per share (EPS) decline so far is 1.7%, versus estimates for a 6% drop. Revenue growth is 4% versus preseason estimates for 1.9%. We’re only about halfway through earnings season, but many of the biggest companies have already reported.

Research firm FactSet now expects Q1 earnings to fall 3.7%, versus its March 31 estimate for a 6.7% drop. About 79% of the companies that have reported to date beat analysts’ earnings estimates, and 74% beat on revenue.

It isn’t unusual for actual earnings to outperform expectations, but if this trend continues, it would be a relatively strong improvement from initial estimates. However, research firm CFRA says that while Q1 earnings are coming in better than expected, analysts’ forecasts for Q2 earnings have eroded. CFRA now expects a 4.8% year-over-year decline in Q1 EPS, up from its initial estimate for a 6.5% drop. It then sees a 6.7% decline in Q2. Softening profit margins play a big role.

Also, don’t focus too much on the “beat” rate, says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. It’s easy for companies to beat estimates when the bar has been lowered swiftly right before reporting season. “It is indeed positive that the blended growth rate for S&P 500 earnings has improved since the start of the year, but the earnings recession remains intact, profit margins are still under pressure, and forward estimates likely don’t yet reflect the full stress from a potential hit to credit,” he says.

What to Watch

Today doesn’t offer much in the way of earnings highlights, especially after the busy week we just had during which one-third of S&P 500® companies reported. still, this is a busy week, with AAPL on Thursday afternoon at the top of the list. Many of the other companies getting ready to report are a bit less high profile but include household names such as Kraft-Heinz (KHC), Pfizer (PFE), Uber (UBER), Ford (F), Starbucks (SBUX), Marriott (MAR), and Anheuser-Busch (BUD). That last one seems apt, considering that by the end of this week it’s likely many investors will be ready for a tall, cold one after the packed calendar they’re working through.

ISM ahead: Soon after today’s open we’ll get the latest look at U.S. manufacturing health in the form of the April Institute for Supply Management (ISM) manufacturing index. It’s been in a tailspin for months, falling to 46.3 in March. That was the lowest reading since May 2020, when the economy was essentially shut down. A 50% figure would be needed to signal expansion, and the index hasn’t been above that since last fall. Analysts expect a slight pop to 46.8 in April, according to Trading Economics. This has been a drag on Gross Domestic Product (GDP).

Growth story: Speaking of GDP, there was a lot of talk after last week’s Q1 GDP report of 1.1% growth that the headline number didn’t represent the full picture. While headline growth was well under analysts’ 2% estimate, the weakness mainly reflected changes to private inventories. On the other side of the coin, consumer spending grew, with spending on goods up 6.5% and on services up 2.3%. Consumer spending makes up about 70% of the economy and may have gotten short shrift from investors when they first glanced at the report. Now that we’re a month into Q2, focus turns to what the current quarter might bring. Expect 1.7% GDP growth in Q2, according to the Atlanta Fed’s GDPNow tool. That’s due for an update today.

Eye on the Fed

A packed earnings calendar and the Fed’s “quiet period” kept interest rate chatter muted last week. That changes in a big way starting tomorrow when the FOMC gathers for its meeting concluding Wednesday. Fed Chairman Jerome Powell’s Wednesday afternoon press conference looms large.

  • As of this morning, the probability of a 25-basis-point rate hike stands at 92% according to the CME FedWatch Tool.
  • The FedWatch Tool now works in about a 70% chance that the Fed will raise rates in May and then pause at the June meeting. There’s now only a 24% probability of another hike in June, according to the tool.
  • After that, the picture’s harder to decipher. The futures market prices in a high likelihood of rates staying on pause through summer before dropping in September. There’s about an 75% probability built into the market that rates will end the year below the current target range of 4.75% to 5%. But the Fed pushes back, forecasting little if any chance of rates falling before 2024 at the earliest. We’ll see Wednesday if anything has changed in Powell’s prognosis.

Happy Monday: Stay up to date with Schwab’s Weekly Market Outlook video every Monday. You’ll get chief global investment strategist Jeffrey Kleintop’s 90-second take on the markets for the week ahead.

CHART OF THE DAY: LOSING GROUND. Industrial sector stocks, represented here by the Industrial Select Sector Index (IXI—candlesticks) have lagged versus the S&P 500 index (SPX—purple line) so far this year despite recent solid earnings news from many large companies in the sector. Worries about recession later this year appeared to keep investors less enthusiastic about this cyclical sector. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Dog wags tail: One positive feature Friday was the market rallying without much participation from the $1 trillion club—meaning the handful of stocks like Apple (AAPL) and Microsoft (MSFT) with market caps requiring 12 zeros to write out. Sure, AAPL and MSFT both rose slightly on Friday, but not as much as small-cap stocks in the Russell 2000 index® (RUT), which jumped nearly 1% after being the weak stepsister of this rally for some time. Small caps have been burdened by their exposure to the domestic economy, which many analysts believe could face recession. A tighter credit market might also work against small-cap fortunes, as smaller firms often depend more on borrowing to get by. The combination of heavy gains for mega-caps and weakness in small caps created an unbalanced rally over the last few weeks, with only a few major names and their heavy index weightings carrying most of the burden. Friday saw a bit more balance, but it was only one day. A healthy rally is one when many sectors and different-sized stocks go up together, not where a small group of heavily weighted stocks sends indexes higher while most companies see their shares flag.

A little green: Last week, Fed data showed the U.S. money supply shrinking at the fastest rate since the 1930s, the fourth straight month it’s fallen. Ultimately, this could help the Fed’s fight against inflation because the less money bouncing around the economy, the less prices tend to rise. However, it could be bad news for asset prices, including stocks. Rising inflation, for instance, helped fuel some of the stronger earnings results recently, with many consumer companies seeing their revenue benefit from higher prices.

Review session: Investors had all weekend to reflect on the market’s initial response to last Thursday’s Amazon (AMZN) earnings and how quickly impressions changed. It’s another reminder that anyone trading an earnings report does themselves no favors by stepping into new positions ahead of the company’s conference call. It’s a lesson some may remember from April 2018 when Caterpillar’s (CAT) CFO arguably spoiled a nice earnings report by saying on CAT’s call that Q1 represented the company’s “high water mark” for the year. That comment laid an egg with investors, sending the stock lower after initial gains, while CAT scurried to walk back the remark.


May 2: Start of two-day FOMC meeting, March Factory Orders, March JOLTS Job Openings, and expected earnings from Cummins (CMI), DuPont (DD), Illinois Tool Works (ITW), Marathon Petroleum (MPC), Marriott (MAR), and Pfizer (PFE).

May 3: FOMC rate decision, April ISM Non-Manufacturing Index, and expected earnings from Bunge (BG), Estee Lauder (EL), Exelon (EXC), Kraft-Heinz (KHC), and Yum Brands (YUM).

May 4: Q1 Preliminary Productivity and expected earnings from Apple (AAPL), Anheuser-Busch (BUD), and PG&E (PCG).

May 5: April Nonfarm Payrolls, and expected earnings from Cigna (CI), Johnson Controls (JCI), Warner Bros. Discovery (WBD).

May 8: March Wholesale Inventories and expected earnings from Tyson Foods (TSN).

Happy trading,                                  



Key Takeaways

  • FOMC meeting highlights a jam-packed week that also includes Apple earnings, jobs report

  • First Republic to be acquired by JPMorgan Chase, putting banks back in focus ahead of FOMC meeting

  • Volatility remains near 17-month lows, but credit tightening signals possible static ahead

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