U.S. stocks ended Friday in the red, as Wall Street wrapped up a week marked by a shift from this year’s big-cap winners to smaller names.
The Dubai Financial Market Index fell by 0.71% to close at 5,505.00 points, and also fell by 0.81% to close at 17,726.94 points, and lost 377.49 points or 0.93% to close at 40,287.53 points.
The declines in the US stock market on Friday were broad-based, with the S&P 500 down 0.63%. However, the focus on stocks that are expected to benefit most from potential interest rate cuts by the Federal Reserve, such as small-cap companies, remained prominent throughout the week.
The S&P 500 and Nasdaq posted their biggest weekly losses since April, falling 1.97% and 3.65%, respectively. The technology-heavy Nasdaq snapped a six-week winning streak. Elsewhere, the Dow rose 0.72% and the small-cap Russell 2000 gained 1.68%.
The week ahead is expected to be eventful, with several key economic indicators due to be released. The main focus is likely to be on the preliminary second-quarter GDP data, due out on Thursday, with many economists expecting a pick-up in growth.
Additionally, personal consumption expenditures (PCE) data, one of the Fed’s favorite inflation gauges, will be released on Friday.
“We expect a modest acceleration from 1.5% growth in the first quarter to 2.0% in the fourth quarter,” JPMorgan economists said in a note.
They added that the core personal consumption price inflation report for June, due on Friday, is expected to show a 0.2% month-on-month increase in prices last month, leaving the year-ago increase unchanged at 2.6%.
Otherwise, investors will be watching the presidential election closely, especially after Joe Biden dropped out of the race. His decision opens the possibility of an open conference, even though the consensus is that US Vice President Kamala Harris is the favorite to win the nomination.
Alphabet and Tesla to report earnings this week
As earnings season begins, the technology-focused S&P 500 faces challenges not only from a shift to small-cap companies but also from potential selling pressure from trend-followers.
Several major S&P 500 companies are due to report their latest quarterly performance this week, and with expectations currently high, any misses could prompt trend followers to sell their extended long positions built up over the past two months, adding further pressure to the benchmark.
Tech giants including Alphabet Inc Class A (NASDAQ:) and Tesla Inc (NASDAQ:) will report their financial results on Tuesday, and are likely to grab most of the spotlight. Additionally, Visa (NYSE:), Chipotle (NYSE:), Coca-Cola (NYSE:), 3M and chipmaker Texas Instruments (NASDAQ:) will also report earnings in the coming days.
What Analysts Are Saying About US Stocks
JPMorgan“The outlook for EPS growth for Mag-7 remains strong, but is set to slow somewhat. SPX ex Mag-7 earnings are expected to be positive +5% YoY, for the first time in 5 quarters. However, we note that earnings convergence has been expected in each of the past five reporting seasons, but the bottom line has consistently been a larger positive surprise for Mag-7 than the rest of the market. This may be the case in the current reporting season, again. In the technology sector, we reiterate the call from last month to move away from hardware/semi-finished and towards software, given declining revenues, geopolitical uncertainty, and the strong outperformance of semi-finished in the past.
UPS“Our base case for the S&P 500 ending the year at 5,900, slightly above the current level of 5,505, holds in most political scenarios — except a Democratic sweep that leads to higher corporate taxes, or a scenario in which former President Trump imposes higher trade tariffs as he has suggested in his campaign rhetoric. We consider either outcome unlikely at present. In addition, we believe that the positive outlook for large U.S. technology companies is likely to offset the political uncertainty.”
Wells Fargo“President Biden has dropped out of the presidential race after his support continued to erode and has endorsed Vice President Harris as his running mate. We may see a modest return of the ‘Trump trade’ but the trajectory from there is likely to be data-driven.”
Stock Strategies from Lynx“We believe that the sell-off we saw last week is likely to reverse somewhat this week. The Sarbanes-Oxley (compared to the S&P 500) has fallen below a reliable level. The fate of the sector will of course be decided by earnings reports, most of which will not arrive until next week.”
“The enactment of the Federal Data Protection Act represents a major shift in US trade policy towards US-allied countries. We believe the Biden administration is unlikely to make major changes to trade policy during the remainder of its term. As such, we believe investor concerns about harsh changes in US policy towards Chinese exports by US and non-US companies are likely to subside. We will be buying semi-cap/semi-cap names.”
Yardeni Research“It’s very confusing as investors have been moving away from tech and the Magnificent-7 since July 11 when a lower-than-expected CPI reading in June convinced investors to invest in interest rate-sensitive stocks because the Fed is now widely expected to start cutting rates in September. We agree, but we also think this could be a one-off rate cut in 2024 because the economy is still holding up. Right now, we think the stock market is overbought and is experiencing a slight sell-off.”