New York – The stock market continued its recent sideways movement on Tuesday, with major indexes little changed as investors awaited key economic data and earnings reports later this week.
The Dow Jones Industrial Average slipped 45 points, or 0.1%, while the S&P 500 and Nasdaq Composite were both roughly flat, edging up less than 0.1%.
Behind the muted moves lies a mix of caution and optimism among investors heading into what is a crucial week for insights into the health of both corporate America and the broader economy.
On the corporate front, it’s earnings season, and over 100 S&P 500 companies are slated to report results this week. Among them are major retailers like Target and Best Buy, whose reports will provide a glimpse into the mindset of consumers amid still high inflation. Also reporting are tech heavyweights like Salesforce, HP and Zoom, whose results stand to sway Big Tech stocks.
On the economic data front, Thursday brings the January reading of the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation. Economists expect the headline index to decline on an annual basis, while the core rate, which excludes food and energy, is seen ticking down as well.
“You have a market that’s waiting with bated breath for the PCE deflator,” said Ross Mayfield, investment strategy analyst at Baird. “That’s really what matters right now, seeing clear signs that the Fed is making progress on inflation coming down.”
Inflation Still Top of Mind for Fed and Investors
Indeed, inflation remains top of mind for market participants as they try to gauge the path of monetary policy.
While inflation has been steadily cooling since hitting its 40-year peak last summer, the Fed has made clear it needs to see a consistent downtrend before it lets up on its policy tightening. Central bank officials have been adamant that interest rates will continue to go higher and stay elevated for some time until inflation is convincingly back down near their 2% target.
“The Fed wants to see inflation move back towards 2% in a sustained way and stay there before contemplating rate cuts,” said Bill Adams, chief economist for Comerica Bank. “I think their threshold for ‘sustained’ is a full 12 months of month-to-month improvements.”
Against that backdrop, Thursday’s PCE print provides pivotal insight into how quickly inflation is normalizing and how much more tightening the Fed still needs to do. A hotter-than-expected reading would likely re-ignite fears of more aggressive policy action, while a cooler number could boost hopes of a softer landing.
“If we get a benign PCE report where the monthly increase is 0.1% or lower, that would be very favorable for markets and likely a catalyst for stocks breaking out to new highs,” said LPL Financial Chief Market Strategist Ryan Detrick. “On the flip side, a hot read could be the pin that pops the rally we’ve seen to begin 2024.”
Earnings Season Spotlight Shifts to Retail, Tech
Apart from the inflation data, earnings will command much of the market’s attention in days to come.
The focus is shifting to retailers this week after big box giant Walmart reported upbeat results last Tuesday, setting an optimistic tone for the sector. Home Depot and Target report on Tuesday, followed by Lowe’s, Best Buy and others later in the week.
“We’ll be watching very closely to see if the strength Walmart reported in their earnings really is indicative of the entire retail space,” said Lindsey Bell, chief markets and money strategist at Ally.
At the same time, tech earnings are ramping up with reports from Dell, Salesforce, HP and Zoom on tap after Nvidia kicked off the tech season with forecast-topping results and upbeat guidance last week.
“Tech needs to rally for the overall market to push definitively into record territory, and the next catalyst for tech stocks will be the continuation of earnings season,” said Detrick.
Of course, as influential as earnings and economic data will be, trading could also hinge on the latest readings of market technicals, sentiment and flows.
Market’s Technical Picture Holds the Key
From a technical standpoint, the S&P 500 continues finding support right around its 50-day moving average, which currently sits around 4,100. That level has buoyed the index several times since the start of the year and new selling pressure likely won’t come unless it breaks decisively below.
Meanwhile, momentum indicators like the relative strength index (RSI) suggest stocks still have more room to run before getting overbought. The RSI on the S&P 500 sits in neutral territory around 55, well below the 70 threshold that signals overextended rallies.
As for sentiment, cautious optimism seems to prevail, with the latest AAII survey showing bulls at 38% versus an historical average of 38%.
“Sentiment suggests there is still some skepticism among individual investors,” said Detrick. “The AAII survey sitting right at its historical average tells me there are still some doubters out there and the wall of worry is still intact.”
Overall flows into equities also indicate pent up buying power after massive outflows last year. Through early February, US equity funds saw inflows for five straight weeks, bucking the trend from 2022, according to BofA Global Research.
Navigating Cross-Currents of Data
Major uncertainties remain, however, that could quickly swing markets one way or the other. Earnings and economic surprises are likely in store, while geo-political tensions, Fed rhetoric and inflation trajectory all present wildcards.
For investors seeking upside, tech and small caps are among the looking most attractive if economic data stays upbeat and yields remain contained, strategists say.
“We would focus on tech for growth — especially semiconductors and SaaS — and small caps for their domestic orientation and reduced currency headwinds,” recommended Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
On the flip side, more defensive tilts like healthcare and staples may provide ballast if inflation persists and recession risks return.
“If the data starts to deteriorate, you want some exposure to low vol, dividend payers and bonds to smooth out returns,” Marcelli noted.
Ultimately, maintaining balance and resisting the urge to make an outsized directional bet seems prudent given the precarious backdrop.
“We’re at a critical point where we could see a breakout, but there’s also still substantial risk,” Mayfield cautioned. “If you have conviction one way or another, this may not be the optimal environment. Having a barbell approach and being able to pivot makes a lot of sense.”
So for the next several days at least, uncertainty remains the name of the game as Wall Street awaits the deluge of signals that will provide the market’s next major catalyst.
