The major U.S. indexes are on pace for a positive week after three losing weeks in a row despite a somewhat disappointing March PCE prices report. There may be relief the data weren't even worse, and yields appeared to take the news in stride. Strong earnings from Microsoft, Alphabet are in focus ahead of Fed meeting next week.
Monthly PCE were in line with analysts’ expectations while the annual figures came in a little above
Microsoft, Alphabet shares surge following solid earnings reports buttressed by cloud, ads
Busy week ahead with Apple and Amazon earnings, Fed meeting, and Nonfarm Payrolls data
(Friday market open) A key U.S. inflation measure rose slightly more than expected in March, but major U.S. stock indexes maintained overnight gains early Friday and remain on track to break a three-week losing streak. Solid earnings from mega caps Microsoft (MSFT) and Alphabet (GOOGL) provided initial support, as did a tame reaction to the price data from Treasury yields.
March Personal Consumption Expenditure (PCE) prices, the Federal Reserve’s favored inflation report, rose 0.3% month over month for both headline and core readings (core strips out volatile food and energy costs). Those figures matched analysts’ average expectations. The trouble came with year-over-year growth of 2.7%, above the 2.6% annual growth Wall Street had expected. Annual core PCE rose 2.8%. While monthly increases were in line with consensus, they didn’t show any signs of improvement, matching February’s gains and suggesting the Fed has more work to do.
“PCE was slightly higher than expectations and continues to be elevated,” said Cooper Howard, director, fixed income strategy, at Schwab. “Although inflation isn’t showing much improvement, yields are slightly lower on the day likely because the market is breathing a sigh of relief that it wasn’t higher.”
Microsoft and Alphabet both delivered positive earnings surprises late Thursday on cloud, AI, and internet advertising vigor. Shares of each surged early Friday, lifting the tech and communication services sectors after yesterday’s Meta Platforms (META)-related plunge.
If it weren’t for PCE and those two mega-cap earnings, investors might be focused today on a major bounce Thursday from heavy selling earlier in the session. The early pressure yesterday from high Treasury yields eased notably in the afternoon following solid results from a 7-year Treasury auction. The auction results helped pull the benchmark 10-year Treasury note yield back from nearly six-month highs posted that morning.
Futures based on the S&P 500® index (SPX) were up 0.8% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) climbed 1%. Futures based on the Dow Jones Industrial Average® ($DJI) inched up 0.2%.
Other data this morning provided more evidence of consumer strength. Personal income rose 0.5% in March, in line with consensus but up from 0.3% the previous month, while personal spending climbed 0.8%, equal to February’s growth but above the 0.6% consensus from Briefing.com. Consumers continue to accelerate spending faster than their income, suggesting credit demand remains strong and that credit is relatively easy to get. It also suggests a healthy jobs market, because people don’t tend to spend above their means if they’re worried about losing their employment.
“Personal income was better than expected so the market is probably thinking it bodes well for other reports,” Schwab’s Howard said.
Diving deeper into PCE, the divergence between services and goods continued in March. Services inflation rose 0.4% while goods climbed just 0.1%. Food prices fell slightly.
Microsoft and Alphabet earnings late Thursday had the opposite impact of Meta’s the day before, perking up the market instead of dragging it down. Alphabet shares rose nearly 12% in premarket trading and Microsoft’s rose 4% after the two companies beat Wall Street’s expectations amid upbeat fundamental developments.
Focus from Microsoft’s Redmond, Washington, headquarters centered squarely on solid performance from the cloud segment. Azure cloud and other cloud services revenue rose 31% year over year, an acceleration from 30% growth the previous quarter and above analysts’ forecast of 28%. This suggests Microsoft’s AI-focused cloud strategy paid dividends.
“Azure has become a port of call for pretty much anybody who is doing any A.I. project,” Microsoft CEO Satya Nadella said. There’s been an increase in the number of large Azure deals, the company said in its earnings call.
Total intelligent cloud revenue of $26.7 billion, which includes Azure, spiked above the company’s prior guidance, as did more personal computing and productivity and business processes. Even the old-line products Windows and LinkedIn enjoyed 11% and 12% growth, respectively, while gaming also contributed. Looking ahead, Microsoft expects similar 30% to 31% Azure revenue growth in the current fiscal fourth quarter. However, the company projected total fiscal Q4 revenue that was slightly below Wall Street’s consensus. This didn’t appear to hurt the stock much, with investors perhaps more focused on the enthusiastic cloud forecast.
Alphabet followed Meta’s recent example by declaring its first dividend. It’s also buying back $70 billion in shares. Both seemed to please investors, judging from the stock’s reaction.
Alphabet benefited from a 20% year-over-year rise in YouTube advertising and better-than-expected Google Cloud revenue. However, traffic acquisition costs increased more than expected. Overall revenue rose 15%, the best performance in more than two years, to above $80 billion.
“Our results in the first quarter reflect strong performance from Search, YouTube, and Cloud,” Alphabet CEO Sundar Pichai said in the company’s earnings release. The company’s Gemini AI product has experienced performance improvements and customers are embracing it. From a guidance standpoint, ad comparisons could grow more difficult with earnings for the current quarter, Alphabet warned. Foreign exchange is another headwind, but the company does expect to deliver operating margin expansion in 2024, executives said on the earnings call.
Earnings parade: About 180 S&P 500 companies reported this week, and next week is just as packed. In fact, by the end of next week, earnings season will be around 60% complete. Highlights in coming days include Amazon (AMZN), Apple (AAPL), Starbucks (SBUX), Advanced Micro Devices (AMD), McDonald’s (MCD), and Coca-Cola (KO), among many others.
As earnings roll along, there are signs of oversold conditions. By Thursday, only 39% of SPX stocks and 27% of Nasdaq Composite® ($COMP) stocks traded above their respective 50-day moving averages. At a sector level, “defensive” sectors that tend to do better in a slower economy, including utilities and staples, feature large percentages of stocks above the 50-day.
Stocks on the move:
Week ahead: Next week is backloaded. Things pick up Tuesday with April Consumer Confidence, and, of course, the Federal Open Market Committee (FOMC) meeting Wednesday. The latter part of the week is dominated by next Friday’s April Nonfarm Payrolls report and to a lesser extent the latest Institute for Supply Management (ISM) data on the manufacturing and services sectors.
Sentiment read: Later this morning, be on the lookout for the final April University of Michigan Consumer Sentiment reading. A headline figure of 77.9 is the Briefing.com consensus, unchanged from the prior report. Year-ahead inflation expectations are a key metric to watch after they rose to 3.1% from 2.9% in March in the last batch of data.
Fed plays second fiddle: Usually, an FOMC meeting would be the highlight of any week. While Fed Chairman Jerome Powell’s post-meeting press conference next Wednesday shouldn’t be missed, this meeting feels a bit anti-climactic. The market prices in no chance of a rate move. Also, this meeting doesn’t include new rate projections. We’ll have to wait until June. In March, policy makers forecast two to three cuts this year.
Recent Fed speakers seldom departed from the “higher for longer” hymnal on rates, as even Powell embraced that creed after sounding more dovish earlier this year. Three months of stubborn inflation pushed rate cut hopes back into the second half of the year.
Thursday in review:
Stocks slumped broadly Thursday after disappointing Q1 GDP data stoked economic concerns even as inflation levels associated with GDP stayed elevated. An 11% nosedive in Meta Platforms hurt technology shares. Banks were also particularly soft amid concern that persistently high interest rates may compress lender margins. Semiconductor and transportation shares were among the few pockets of strength.
The SPX ended a three-day upturn but is still on track to break a three-week losing streak.
Early today, futures traders place 97% 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 11%, rising to roughly 31% for the late-July meeting, based on the CME FedWatch Tool.
CHART OF THE DAY: POWER BREAK. The Utilities Select Sector Index ($IXU-candlesticks) had a bullish breakout in March and recently retested old resistance as new support. The sector is making relative strength gains against the S&P 500 index (SPX). This could signal that stock investors don’t see the recent notion of possible rate hikes from the Fed later this year despite stubborn inflation numbers, because utilities tend to have a negative relationship with bond yields. Second, investors may be looking for safe havens and utilities tend to perform best when things are starting to look worse. Data source: S&P Dow Jones Indices. Chart source: thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.
Ideas to mull as you trade or invest
Inflection point: With inflation sticky and job growth and wages showing no sign of slowing, investors may be asking themselves, how does this combination bode for corporate sales and profits? There could be an inflection point where companies aren’t able to pass along higher costs to consumers, and recent data hints that point is near. Companies reporting earnings so far this quarter are generally exceeding Wall Street’s profit estimates but aren’t impressing with revenue, perhaps a sign they can’t grow sales simply by raising prices.
Talking technicals: For those who watch Fibonacci levels, Thursday’s session delivered an interesting twist. The SPX plummeted more than 1.5% early in the day but bottomed right at the 23.6% Fibonacci retracement of the October-through-March rally, near 4,990. It then bounced to close well above 5,000. That’s positive from a chart perspective, though today’s PCE data may ultimately hold more sway in terms of the next move. The next point to watch from a technical perspective is the 50-day moving average of 5,122. The SPX has traded below the 50-day since mid-April, the longest stretch since last November.
Out to lunch: Next week is key for restaurants. People complain all the time about rising menu prices, so does that mean they’re staying home to eat? Earnings from companies like McDonald’s (MCD), Texas Roadhouse (TXRH), Starbucks (SBUX), and Wendy’s (WEN), among others, could help tell the tale. The labor market was generally strong in Q1, which often translates into solid results for the restaurant industry. However, none of the four chains above knocked the ball out of the park with their results from the prior quarter. Casual dining, which includes Texas Roadhouse, has faced declining traffic patterns and, in some cases, unit count retrenchment, in what Nation’s Restaurant News calls “a challenging post-pandemic environment.” Olive Garden saw same-store sales sink last quarter for the first time since Covid-19, said Darden Restaurants (DRI), owner of the chain. “The lower income customer does appear to be pulling back,” Darden executives said in the company’s March earnings call.
April 29: Expected earnings from Paramount Global (PARA).
April 30: April Consumer Confidence, Q1 Employment Cost Index, and expected earnings from 3M (MMM), Coca-Cola (KO), Eli Lilly (LLY), McDonald’s (MCD), Advanced Micro Devices (AMD), Amazon (AMZN), Starbucks (SBUX), and Super Micro Computer (SMCI).
May 1: FOMC meeting announcement and press conference, March construction spending, April ISM Manufacturing Index, and expected earnings from CVS Health (CVS), DuPont (DD), Estee Lauder (EL), Mastercard (MA), and Carvana (CVNA).
May 2: March Trade Balance, March Factory Orders, and expected earnings from Baxter (BAX), ConocoPhillips (COP), Apple (AAPL), Amgen (AMGN), and Coinbase (COIN).
May 3: April Nonfarm Payrolls, April ISM Non-Manufacturing PMI, and expected earnings from Hershey Foods (HSY).
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. © 2024 Charles Schwab & Co. Inc. All rights reserved.