By David Randall
NEW YORK (Reuters) – Nervous investors are bracing for earnings from the market’s biggest technology companies, a Federal Reserve policy meeting and closely watched employment data in a week that could determine the immediate path for U.S. stocks after a bout of intense turmoil.
A months-long rally in tech stocks hit a wall in the second half of July, culminating in a selloff that saw the index post its biggest one-day loss since 2022 on Wednesday after disappointing earnings from Tesla (NASDAQ:TSLA) and Google parent Alphabet (NASDAQ:GOOGL).
There could be more volatility ahead. Next week’s earnings from Microsoft (NASDAQ:), Apple (NASDAQ:), Amazon (NASDAQ:) and Facebook (NASDAQ:) parent Meta Platforms (NASDAQ:) could test investors’ tolerance for a potential earnings shortfall from tech giants. The massive gains in the world’s biggest tech companies this year have lifted markets but raised concerns about overvalued valuations.
Although the S&P 500 is still only about 5% below its all-time high and has gained about 14% this year, some investors fear that Wall Street has become too optimistic about earnings growth, leaving stocks vulnerable if companies fail to meet expectations in the coming months.
Investors will also be closely watching comments from the Federal Reserve’s policy meeting on Wednesday for clues on whether officials are ready to cut interest rates, which market participants widely expect to begin in September. Employment data at the end of the week, including the closely watched monthly jobs report, could indicate whether the nascent slowdown in the labor market is becoming more acute.
“This is a critical time for the markets,” said Bryant VanCronkite, portfolio manager at Allspring. “People are starting to wonder why they paid so much for these AI companies when the market is worried that the Fed will miss its chance to secure a soft landing, which is causing a backlash.”
Recent weeks have shown signs of prominent tech leaders moving out into market sectors that have been depressed for much of the year, including small-cap companies and value stocks like financials.
The Russell 1000 Value Index is up more than 3% since the beginning of the month, while the Russell 1000 Growth Index is down about 3%. Small-cap stocks are up about 9% this month, while the S&P 500 has lost more than 1%.
Even strong earnings may not be enough to pull the broader market out of its recent slump, at least in the near term, said Keith Lerner, chief market strategist at Truist.
“The market will take its direction based on the fact that these stocks have fallen. I think technology stocks have fallen so much that even if these names rise on earnings, people will be quick to sell them at any gains,” he said.
Any signs that the Fed is seeing a worse-than-expected deterioration in the economy could also unsettle investors, disrupting the narrative of slowing inflation but strong growth that has supported markets in recent months.
“We think they’re going to stick to the data-driven scenario, but the data hasn’t been a straight line,” said Matt Perron, head of global solutions at Janus Henderson Investors. Conflicting signs in the economy have included faster-than-expected GDP growth in the second quarter and a slowdown in manufacturing activity.
Markets are now pricing in a near-certainty that the Fed will begin cutting interest rates at its September meeting, and are forecasting a total of 66 basis points of cuts by the end of the year, according to CME’s FedWatch tool.
Employment data at the end of the week could affect these odds if it shows the economy slowing faster than expected, or conversely, if it shows a picture of recovering growth.
However, the recent selloff can be viewed as a healthy part of a bull market that is burning off excess froth, according to Charles Lemonides, president of hedge fund ValueWorks LLC.
“I think the longer-term story is that growth names will carry us to another high in the market somewhere down the road,” he said.