Investors are on edge as they await earnings reports from the largest tech companies, a Federal Reserve policy meeting, and key employment data, all of which could influence the short-term direction of US stocks after a period of intense volatility. The tech sector's prolonged rally faced a setback in the latter half of July, culminating in a significant selloff that led to the S&P 500 and Nasdaq Composite Index recording their steepest one-day declines since 2022 following disappointing earnings from Tesla and Google's parent company, Alphabet. Further market turbulence may be imminent.
Next week's earnings from tech giants like Microsoft, Apple, Amazon, and Facebook's parent company, Meta Platforms, could challenge investors' patience with potential earnings disappointments. The strong performance of the world's leading tech companies this year has driven market gains but has also raised concerns about overvalued stocks. Despite the S&P 500 being just 5% below its record high and up nearly 14% this year, some investors fear that Wall Street's optimism about earnings growth may be excessive, making stocks susceptible if companies fail to meet expectations in the coming months.
Investors will also scrutinize the Federal Reserve's post-meeting comments on Wednesday for hints about potential interest rate cuts, which are widely anticipated to start in September. The employment data released at the end of the week, including the highly anticipated monthly jobs report, could reveal whether a recent slowdown in the labor market has intensified. "This is a pivotal moment for the markets," noted Bryant VanCronkhite, a senior portfolio manager at Allspring, highlighting concerns about overpaying for AI businesses and the Fed's ability to achieve a soft economic landing.
Recent trends indicate a shift from leading tech stocks to sectors that have underperformed for much of the year, such as small caps and value stocks in the financial sector. The Russell 1000 Value index has risen over 3% this month, while the Russell 1000 Growth index has fallen nearly 3%. The small-cap focused Russell 2000 has surged nearly 9% this month, whereas the S&P 500 has declined more than 1%. Even robust earnings might not be sufficient to lift the market out of its current slump, at least in the short term, according to Keith Lerner, chief market strategist at Truist.
Any indications that the Fed perceives the economy as deteriorating more than expected could unsettle investors, disrupting the narrative of easing inflation coupled with resilient economic growth that has supported markets recently. "We believe they will continue to be data-dependent, but the data has not been consistent," said Matt Peron, global head of solutions at Janus Henderson Investors. Market expectations currently lean heavily towards the Fed initiating interest rate cuts at its September meeting, with expectations for a total of 66 basis points in cuts by year-end, according to CME's FedWatch Tool.
The employment data at the end of the week could influence these expectations, showing either a faster-than-anticipated economic slowdown or signs of recovery. The recent selloff, however, could be viewed as a necessary correction in a bull market that removes excessive speculation, according to Charles Lemonides, head of hedge fund ValueWorks LLC. "I believe that growth stocks will lead us to another market peak in the future," he concluded.
