New York – The Dow Jones Industrial Average edged lower on Friday morning, as investors braced for the release of a highly anticipated inflation report later in the day. Meanwhile, semiconductor leader Advanced Micro Devices (AMD) powered to record highs, buoyed by strong earnings results.
The Dow slipped 60 points, or 0.2%, in early trading, pulling back slightly from the six-month highs hit earlier in the week. The S&P 500 and tech-heavy Nasdaq were largely flat.
All eyes are on the Personal Consumption Expenditures (PCE) price index due out at 8:30 am ET. The PCE is the Federal Reserve’s preferred gauge of inflation and will provide critical clues into whether the central bank can continue easing up on its aggressive rate hike campaign.
Economists expect the headline PCE to rise 0.4% in January, while the core rate, which excludes food and energy, is seen climbing 0.4%. Year-over-year, headline inflation is projected to cool to 5.4% from 5.5% in December. The core rate is expected to moderate to 4.4% from 4.6%.
Today’s PCE data will be pivotal in determining the Fed’s next moves,” said Edward Jones chief investment officer Anita Hill. If we see inflation continuing to drift lower, it will likely give the Fed the green light to slow rate hikes further. But an upside surprise could put them back into inflation-fighting mode.”
The Fed raised rates by a quarter point earlier this month, downshifting after a string of jumbo 0.75 percentage point hikes last year aimed at taming scorching inflation. Investors are optimistic that ongoing moderation in prices could allow the central bank to take its foot off the brakes, providing support to stocks.
Tech Stocks in Focus Tech and growth stocks have been particular beneficiaries of the Fed’s pivot to less aggressive tightening. On Thursday, the tech-dominated Nasdaq rallied 1%, marking its best day since July.
Chip leader AMD was among the big winners, soaring 9% to a new high. The company posted robust fourth-quarter results after the bell on Wednesday, with adjusted earnings surging 63% compared to a year earlier. Revenue also topped expectations, rising 16% thanks to strong data center and embedded chip sales.
AMD continued to fire on all cylinders, turning in standout results despite a challenging macro backdrop,” said CFRA Research analyst Angelo Zino, who boosted his price target on the stock by 10% to $200 per share.
AMD’s upbeat report lifted other semiconductor names as well. Nvidia jumped 4%, while Qualcomm and Broadcom gained over 2% each. The Philadelphia Semiconductor Index rallied nearly 4% for its best single-day performance in over a month.
Earnings Roll In It was another busy day on the earnings front. Cybersecurity leader Zscaler tumbled 7% after issuing disappointing guidance for the current quarter. Shares of cloud software firm Autodesk surged 8% after the company topped estimates and announced a new $5 billion buyback program.
PC-maker Dell Technologies saw its stock rocket 30% higher following better-than-expected results, driven by strong commercial PC sales. Networking-gear provider NetApp also beat expectations, sending its shares up 15%.
Looking Ahead Major indexes are on track to close out another winning week, continuing 2023’s red-hot start. The S&P 500 is up over 8% year-to-date, on pace for its best two-month performance since 2001.
While more Fed rate hikes are likely on tap, easing inflation and solid economic data have fueled hopes that the central bank could achieve a “soft landing” – cooling prices while avoiding tipping the economy into a severe downturn.
“We’ve seen a remarkable pivot in sentiment from the depths of bearishness in October,” said LPL Financial chief strategist Quincy Krosby. “Recession fears have eased significantly thanks to resilient economic activity and inflation moving in the right direction.
She cautions, however, that the path ahead is unlikely to be smooth sailing. “Challenges remain, particularly on the inflation front,” said Krosby. The Fed still has more work to do and we could see some market turmoil return at points this year.
With the first half of 2023 shaping up to be strong, what should investors be watching in the coming months? Here are some of the key themes and unknowns that could drive markets for the rest of the year:
The Fed’s Next Moves The central question facing investors is how much further the Fed will raise rates and how long it will keep policy restrictive before cutting again. Markets are currently pricing in two more small quarter-point hikes this spring, which would lift the federal funds rate to a peak range of 5% to 5.25%.
But policymakers have stressed they want to see a consistent pattern of moderating inflation before letting up. If price pressures prove stickier than expected, the Fed may have to get more aggressive.
“The Fed is attempting a nifty bit of mountain climbing here, trying to tame inflation while avoiding recession,” said Heights Capital Management portfolio manager Marshall Schield. “Navigating that narrow path only gets trickier from here. One slip could bring a painful selloff for risky assets.”
Earnings Outlook Fourth-quarter earnings season has so far exceeded diminished expectations. With over 70% of S&P 500 companies reporting, earnings are on track to decline about 2.5% versus the year-ago period – much better than initial forecasts for a nearly 10% drop.
“Companies have shown remarkable resilience in terms of profitability,” said McKinsey & Co. senior partner Daniela Braga. But the road gets harder from here as the effects of higher rates and weaker demand growth start to bite.
Guidance from corporations will be essential in gauging whether earnings can continue to hold up reasonably well or if a steeper slide is on the way. Any signs of margin compression or slowing business momentum could spark increased unease.
China’s Reopening The world’s second largest economy has embarked on a rapid reopening after years of rigid zero-Covid restrictions. While the initial growth rebound could provide some relief to battered global supply chains, China’s exit wave also poses risks.
“China’s reopening is a decidedly double-edged sword,” warned BlackRock Investment Institute strategists in a recent note. “It should bring a welcome boost to global growth later this year but may lift inflation too.”
Any Covid resurgence straining China’s health system or setbacks in spurring domestic demand could also dampen the country’s contribution to worldwide commerce. And simmering tensions between Washington and Beijing continue threatening stability.
Geopolitical Hotspots Russia’s war in Ukraine is likely to remain a flashpoint with major economic implications. Escalations in fighting or any disruptions in energy flows will elevate volatility.
Meanwhile, markets face unpredictability from several key elections slated for this year, including presidential races in Nigeria, Turkey and Argentina.
Other global hotspots like Iran, North Korea and Taiwan also harbor potential to roil markets if long-running tensions boil over.
Recession Odds Economists currently peg the odds of a downturn starting sometime in 2023 around 45%, according to Bloomberg’s latest survey. While solid job gains, robust spending and easing inflationary pressures point to resilience, risks remain weighted to the downside.
“Consumers and businesses have shown surprising durability, but we’re not out of the woods,” said Wells Fargo senior economist Sarah House. “A downturn later this year or in early 2024 still seems more likely than not.”
Inverted yield curves, housing weakness, supply chain fragility and a worn out consumer threaten to catch up with the economy at some point. But the million dollar question is when.
Market Outlook Despite its brisk start, 2023 still holds plenty of uncertainty. Inflation bouncing back, an aggressive Fed, wobbly earnings and geopolitical turmoil could easily combine to halt the rally at any time.
But absent a major shock, stocks may still grind higher in the coming months as fears subside over a hard landing. By late 2023, however, risks look set to grow as the lagged impacts of tightening bite down more severely.
“We expect returns to moderate in the back half of the year and volatility to remain elevated,” said Hill. “Patience and prudence will be key, with sharp swings likely. But for long-term investors, we still see equities offering the best prospects compared to bonds and cash.”
