The stock market rally continued last week, with the Nasdaq Composite (^IXIC) clinching an 8th-straight winning week while the S&P 500 (^GSPC) continued its bull run with a 2.5% gain after key news on inflation and a pause in the Federal Reserve’s rate hiking campaign.
In the week ahead, investors will again keep their focus on the US central bank with Fed Chair Jay Powell set to testify before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday morning as part of his semi-annual testimony before lawmakers.
On the corporate calendar, earnings out of FedEx (FDX) after the close on Tuesday will serve as the week’s top highlight. The shipping giant is seen as a bellwether of economic activity given its exposure across industries.
Fed Governors Lisa Cook and Philip Jefferson will also be on Capitol Hill this coming week for confirmation hearings before the Senate. Cook was nominated by President Biden to fill a full term as a member of the Fed’s Board of Governors, while Jefferson was nominated by Biden to fill the role of Vice Chair.
The economic calendar will also be relatively quiet with investor attention on Thursday’s initial jobless claims data continuing to build amid signs the labor market is softening, while initial looks at manufacturing and service sector activity from S&P Global out Friday will provide a look at how the US economy is rounding out the second quarter.
US markets will be closed on Monday in observation of Juneteenth.
With less than two full weeks of trading left in the second quarter and first half of 2023, all three major indexes are currently sitting on gains with the Nasdaq now up more than 30% this year while the S&P 500 is up just less than 15%.
The Dow Jones Industrial Average (^DJI) — which fell 9% last year against a roughly 20% drop for the S&P and 30% decline for the Nasdaq — is up 3.5% so far this year.
Last week, the Fed left its benchmark interest rate unchanged, marking the first time since January 2022 the central bank did not raise interest rates following a policy meeting. Still, the Fed’s move was accompanied by updated economic forecasts which suggested two more rate hikes will be needed over the balance of 2023 to bring inflation down towards the Fed’s 2% target.
Thomas Simons, an economist at Jefferies, wrote in a note last week the “hawkish shift” in the Fed’s interest rate forecast, “helps to reinforce the Fed’s message that this ‘skip’ in June should not immediately be interpreted as the end of the Fed rate hike cycle.”
Inflation data out Tuesday morning showed the Fed is making some progress towards its goal of bringing inflation back to 2%, with consumer prices rising at the slowest pace in 13 months in May, according to the Consumer Price Index (CPI).
On a core basis, however, CPI inflation showed prices rose 5.3% over the prior year in May, well above the Fed’s stated goal.
As Powell said during a press conference last week, “inflation pressures continue to run high and the process of getting inflation back down to 2 percent has a long way to go.”
Still, many economists expect the Fed will not need to follow through on the additional rate hikes signaled by its forecast.
“Although officials are now minded to keep going after that, we think that weaker activity and employment, together with more encouraging signs that core inflation is moderating, will ultimately persuade the Fed that is doesn’t need a final hike in September,” wrote Paul Ashworth, chief North America economist at Capital Economics, in a note last week.
In the stock market, the conversation has begun to somewhat move away from the play-by-play of what happens next with the Fed as AI hype continues to dominate the conversation.
And it is becoming a near-consensus view that this mania has played — and will continue to play — a key role in driving stocks higher this year.
“We now suspect growing euphoria over AI will drive the S&P 500 to a significantly higher level than we had previously forecast by the end of next year,” wrote John Higgins, chief markets economist at Capital Economics, in a note on Friday.
As far back as April, strategists began circling the idea that AI hype was having a broader pull on the stock market.
And with the so-called “Magnificent Seven” megacap tech stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) — having done much of the heavy lifting in turning the market around this year, the fundamental read-through is that incumbent tech giants will be the winners in the AI “revolution” set to sweep the business world.
Though strategists at Goldman Sachs earlier this month made an even bolder argument regarding AI’s impact on the stock market, suggesting overall S&P 500 earnings could be 11% higher than currently expected a decade from now because of efficiencies companies may realize from AI.
But if over the long run earnings drive stock prices and economic growth drives earnings, then many remain wary about the prospects beyond what has become a euphoric first half of the year.
“We still think a mild economic downturn may take some heat out of the stock market in the second half of 2023,” Capital Economics’ Higgins wrote on Friday.
“Let’s be clear from the outset: equities have nearly always fared poorly when the economy has turned down,” Higgins added. “Since 1855, there have been 34 recessions in the US and the stock market has declined around the vast majority of them. It typically peaked before a recession began, and troughed shortly before it ended.”
Stock prices reflect expectations for future earnings discounted to the present. And it can certainly be argued the current market rally has already priced in this heavily-anticipated recession and subsequent rebound.
Or perhaps the market is simply betting the recession “everyone” sees coming never arrives.
Economic data: Homebuilder confidence, June (51 expected, 51 previously)
Earnings: No notable companies expected to report.
Economic data: Building permits, May (+0.4% expected, -1.5% previously); Housing starts (-0.4% expected, +2.2% previously)
Earnings: FedEx (FDX), La-Z-Boy (LZB)
Economic data: Weekly mortgage applications (+7.2% previously)
Earnings: Winnebago (WGO), KB Home (KBH), Steelcase (SCS)
Economic data: Initial jobless claims (260,000 expected, 262,000 previously); Existing home sales, May (-0.7% expected, -3.4% previously); Conference Board leading index of economic indicators, May (-0.8% expected, -0.6% previously); Kansas City Fed manufacturing activity, June (-1 previously)
Earnings: Darden Restaurants (DRI), FactSet (FDS)
Economic data: S&P Global flash manufacturing PMI, June (48.5 expected, 48.4 previously); S&P Global flash services PMI, June (54.0 expected, 54.9 previously)
Earnings: CarMax (KMX), Apogee (APOG)
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