27.04.2023 The Clouds Hanging Over Wall Street

Stock bulls are still struggling to gain ground despite some notable earnings beats. Facebook-parent Meta is the latest big tech company to surprise with better-than-expected results with both Q1 sales and the forecast for Q2 topping forecasts. Amazon reports today and hopes are high that the company’s layoffs and other cost-cutting efforts will translate to an earnings beat and better outlook going forward. Even with promising tech results, stocks may still have a tough time climbing much higher as investors eye several potentially big headwinds ahead.

Fed

The most immediate cloud hanging over Wall Street is the Federal Reserve’s policy meeting next Tuesday and Wednesday (May 2-3). Investors still widely expect the central bank to lift rates by 25-basis points. More importantly, a majority also anticipate the Fed will pause its rate hiking campaign at the June 13-14 meeting and will be looking for confirmation of that next week.

Remember, a key driver behind this year’s stock rebound has been the expectation that the Fed was nearing the end of its tightening cycle. Meaning if the Fed doesn’t signal an end to interest rate hikes next week, those gains could be at risk. Bears also point out that much of this year’s rally has been limited and led mostly by big tech, which is far outperforming the broader market. That’s evident in the Nasdaq’s outsized gains this year with the index up more than +13% versus a gain of +5.6% for the S&P 500 and just +0.5% for the Dow.

Bears further warn that while tech’s cost-cutting efforts may boost profits in the short-term, the sector’s continued layoff announcements signal a weakening outlook that may not bode well for earnings in the quarters ahead. A recession later this year would likely dent tech’s outlook even further, along with most other sectors.

Worries about an economic downturn have somewhat improved on Wall Street, particularly with housing prices holding up. Still, the worry remains that even a “mild” recession like many now predict would work to keep a lid on growth, thus making higher stock prices tougher to justify.

Data to watch 

Another big worry on Wall Street is the US debt ceiling which many think will be reached sometime in June. The House yesterday passed a Republican bill that would raise the limit but it includes deep cuts to some of President Biden’s key programs and is considered “dead on arrival” in the Senate. House Speaker Kevin McCarthy said the bill was meant to spark a dialogue with the Biden administration. However, Biden and Congressional Democrats are insisting on a debt ceiling increase with no spending cuts attached.

Today, investors will be digesting earnings Boeing, CME Group, eBay, Edwards Lifesciences, O’Reilly Automotive, and Thermo Fisher Scientific. Amazon reports after markets close.

On the economic data front, the first estimate of Q1 2023 GDP is due out, along with Pending Home Sales and the Kansas City Fed Manufacturing Index.

The Clouds Hanging Over Wall Street

Wishing you a great week!