U.S. stocks traded moderately lower on Tuesday morning, taking a breather from the recent rally that has seen major indexes surge over the past couple of weeks. The pullback came as investors awaited several potential market-moving events set for later in the day.
The Dow Jones Industrial Average fell 0.2%, while the broader S&P 500 dipped 0.3% and the tech-heavy Nasdaq slid 0.8%. The declines put the S&P 500’s five-day winning streak in jeopardy after the benchmark notched gains in 14 of the past 16 sessions, propelling it to near four-month highs.
Driving the cautious sentiment on Tuesday was a mixed set of retail earnings results, which provided an uneven glimpse into consumer spending ahead of the vital holiday shopping stretch. Investors also looked ahead to the release of minutes from the Federal Reserve’s early November meeting, eager for insights into policymakers’ thinking around interest rates and the economy.
However, the spotlight was squarely focused on AI chipmaker Nvidia, with its quarterly results due after the closing bell. As a heavyweight in the tech sector and broader markets, Nvidia’s report and guidance could significantly sway sentiment in either direction. The company’s shares have skyrocketed over 240% year-to-date amid booming demand for AI applications.
Retail Earnings Paint Murky Picture of Consumer Health
A slate of retail earnings results on Tuesday painted a checkered picture of consumer discretionary spending. Standouts included Abercrombie & Fitch and Dick’s Sporting Goods, which topped estimates and issued upbeat guidance thanks to robust back-to-school sales.
However, the optimism was tempered by softness from the likes of Kohl’s and Best Buy, which fell short on same-store sales growth and revenue projections. Best Buy even lowered its full-year outlook, explicitly calling out pressures on discretionary purchases. Home improvement giant Lowe’s similarly trimmed its 2022 forecast.
The divergent performances align with forecasts of modest holiday sales growth around 1-3%, according to Moody’s Investors Service. That would mark a significant pullback from last year’s 5.1% expansion, as stubborn inflation and higher borrowing costs weigh on household budgets.
All told, the mixed bag speaks to an uncertain economic environment that is leading consumers to tighten their belts and become more selective with spending. That could create winners and losers across the retail sector this holiday season.
Fed Minutes Eyed for Rate Hike Signals
As the U.S. stock market’s epic rally over the past month attests, investors increasingly believe the Fed is nearing the end of its aggressive rate hike campaign aimed at taming inflation. The central bank has lifted its benchmark rate by 3.75 percentage points this year to a range of 3.75-4%, sharp and sustained increases unseen since the 1980s.
However, there are concerns monetary policymakers may need to do more to decisively break the back of inflation that remains near 40-year highs by some measures. At the same time, officials wish to avoid inadvertently triggering a recession through overtightening.
That delicate balancing act will be in focus when minutes from the Fed’s November 1-2 meeting are published at 2 p.m. ET. Though the decision to lift rates by 75 basis points was largely expected, investors will scour the minutes for clues around policymakers’ appetite for a 50 or 75 basis point move at the pivotal December gathering.
The minutes may also provide color around officials’ views on the lagging effects of policy tightening thus far, as well as their assessment of risks related to over or under-tightening. Any evidence of a Fed willing to tolerate inflation over target for longer could spark concerns of rates staying higher for longer.
Nvidia Earnings Loom Large
With its shares up over 240% year-to-date, Nvidia has been one of the standout success stories across markets in 2022. While major indexes remain mired in bear market territory, the semiconductor leader has soared on white-hot demand for AI and graphics processing chips amid the rise of metaverse and other next-gen technologies.
Already up roughly 50% since mid-October, Nvidia stock has room for substantial volatility in either direction following its quarterly report. A meaningfully positive or negative surprise could spur an outsized market reaction compared to a typically quiet pre-holiday trading period.
Options markets are pricing in a one-day move of at least 8% for Nvidia shares, underscoring the uncertainty. Strong results could send the stock to fresh all-time highs, while any disappointing figures may lead investors to cash in recent profits. Beyond the headline numbers, Nvidia’s commentary around data center and gaming chip demand will also hold significance.
In many ways, Nvidia’s dominance of bleeding-edge technology makes its earnings an important bellwether for broader risk appetite and the economy. An upbeat report could perk up sentiment and overshadow Tuesday’s early stock market weakness.
Conclusion
After charging higher in recent weeks on easing Fed policy bets, U.S. stocks took a pause on Tuesday amid a risk-off mood tied to uncertainty around retail spending and central bank tightening plans. The mixed set of earnings results and pending Fed minutes gave investors an excuse to lock in some profits.
However, Nvidia‘s widely anticipated quarterly figures after the close held the potential to set the tone in either direction. Strong results from the high-flying chip stock could spark a late-day rebound and overshadow the early downward drift. On the flip side, any cracks in Nvidia’s momentum may lead the recent rally to further unravel.
