Wall Street’s busy week kicked off with gains in both stocks and bonds, with the Treasury surprising several traders after cutting its quarterly borrowing estimate to $760 billion.
The news came a few days before the Treasury’s quarterly refunding announcement and drew investors’ attention amid all the concern about a widening budget deficit. Treasury yields fell, lifting the tech-heavy Nasdaq 100 up 1% ahead of results from five megacaps that have a combined market value of more than $10 trillion. Aside from the deluge of earnings this week, investors are also awaiting the Federal Reserve’s rate decision and a raft of data from consumer confidence to jobs.
“This week could be key,” said Chris Larkin at E*Trade from Morgan Stanley. “If the market is going to sustain its latest breakout, it may need to avoid earnings disappointments from this week’s big-tech lineup, get encouraging news from the Fed on interest rates, and see jobs numbers that are solid, but not too hot.”
The S&P 500 topped 4,900, with Tesla Inc. leading gains in megacaps. Amazon.com Inc. abandoned its planned $1.4 billion acquisition of iRobot Corp., sinking shares of the Roomba maker. Treasury 10-year yields dropped seven basis points to 4.07%. Oil fell after last week’s rally pushed futures into overbought territory. At the same time, ample crude supplies outweighed military escalation in the Middle East.
This week also marks the busiest this season for earnings, with results from Microsoft Corp., Alphabet Inc., Apple Inc., Amazon.com Inc. and Meta Platforms Inc. As most of the megacaps remain in record territory, there are concerns that investors are over- exposed to just a handful of stocks, which could open the door for some pain if quarterly results underwhelm.
The next few days will be crucial to determine whether stock valuations — particularly those of megacap US technology companies — are sustainable given that investors are pricing in significant earnings growth expectations in anticipation of rate cuts coming sooner than Fed officials project, according to JPMorgan Chase & Co.’s Marko Kolanovic.
“The 800-pound gorillas all report this week,” said Paul Nolte at Murphy & Sylvest Wealth Management. “Expect to see some market volatility around those earnings. Combined with a Fed meeting, this week could be a wild ride as we head into February.”
After a bit of a rocky start to the year, the S&P 500 went on to cap a third straight weekly advance — and is now up almost 20% since late October.
In the week through January 23, a ratio of bulls to bears identified in an Investors Intelligence survey of newsletter writers was hovering at the highest since 2021, when stocks neared a prior peak before the 2022 bear market, Yardeni Research analysis shows. Another signal of elevated bullishness was evident in a weekly survey of retail investors by the American Association of Individual Investors.
Dan Wantrobski at Janney Montgomery Scott is on the watch for further “profit-taking” or “consolidation” in leadership areas — which remain overbought on a short-term basis, according to him.
Going into this week’s two-day Fed policy meeting, investors are assigning roughly even odds to the prospect that the central bank will start lowering borrowing costs at its next decision in March.
That makes Fed Chair Jerome Powell’s press conference, and any signal he may or may not choose to send, of critical importance. It all comes down to how officials have been reading the recent spate of economic data. On one hand, inflation numbers continue to surprise to the downside. On the other, consumer spending continues to be surprisingly robust.
“The Fed could justifiably signal a March cut,” said Robert Teeter at Silvercrest Asset Management. “Nonetheless, we expect the Fed to back away from taking action in March, while simultaneously laying the groundwork for future cuts predicated on the removal of excessively restrictive rates.”
