Dow Jones, Nasdaq, S&P 500 weekly preview: All eyes on Fed

By Senad Karaahmetovic

The U.S. stock market opened the new week higher despite fears of more bank failures, recession, and uncertainty over Fed rate hikes. Despite a selloff on Friday, the S&P 500 closed the week 1.4% higher.

The NASDAQ Composite Index staged a massive rally to close 4.4% in the green. Mega- and large-cap tech stocks benefited from rotations out of energy and financials.

“We saw and heard there was massive demand in mega-cap tech across trading desks street wide,” said Mizuho analysts.

On the other hand, value- and small-cap stocks underperformed with Dow Jones Industrial Average and Russell 2000  (NYSE:IWM) closing 0.15% and 2.6% lower, respectively. Gold and Bitcoin continue to rally while oil is moving in the opposite direction on the growth concerns.

Based on Friday’s closing price, the forward 12-month P/E ratio for the S&P 500 is 17.1. This P/E ratio is below the 5-year average (18.5) and below the 10-year average (17.3).

Fed in the spotlight

Volatility is expected to continue this week despite the Swiss government-brokered deal for UBS (SIX:UBSG) to acquire Credit Suisse (SIX:CSGN) for $3.2 billion.

“The turmoil still has at least a couple of days to play out, and only the Fed can come in and calm that,” analysts at IG Group Holdings Plc told Bloomberg today.

The key event this week is undoubtedly the March FOMC meeting on Wednesday. On the economic data front, the durable goods report is due on Friday. The market looks torn on what the Fed will do next amid the ongoing global banking crisis. The options market seems divided between holding and 25 bps.

“We project the FOMC will hike policy rates 25bp to 4.75-5.00% and raise the 2023 median dot 25bp to 5.25-5.50%,” Citi analysts wrote in a note on Monday.

What analysts are saying about U.S. stocks:

Here’s what Wall Street analysts expect to see in the stock market this week.

Wells Fargo analysts: “Expect a short-term bounce as financial concerns are addressed; longer term, more economic concerns. Wider credit spreads + Bank underperformance = tough combo. On strength add low risk duration; Value→Growth, Hardware→Software, and reduce leverage.”

JPMorgan analysts: “We stick to our call that Q1 will likely end up the high point for stocks this year… We believe that what was a still resilient market backdrop earlier in the year, given light positioning, activity pickup, and supportive seasonals, is expiring. While parts of the market look short term oversold, and there could be potential relief bounces, we advise to use these to sell into. It is unlikely that we will have a fundamental low reached until the Fed is well advanced with rate cuts.”

BTIG analysts: “Bonds are usually the only real safe haven, and it's certainly not growth equities. In bear markets, which we still believe we are in, divergences are typically resolved with the strong catching down to the weak. The opposite is typically true in bull markets. Therefore, we would look to fade the recent strength in large-cap tech/growth and look for it to 'catch-down' to the weakness in small-caps and value.”

Berenberg analysts: “We have argued in recent weeks that we would not be chasing the start-year rally in equities and that is still the case. We see the case for more balance and more defensive exposure in portfolios for coming months.”

Morgan Stanley analysts: “Over the past month, the correlation between stocks and bonds has reversed and is now negative. In other words, stocks go down when rates fall and vice versa. This is in sharp contrast to most of the past year when stocks were more worried about inflation, the Fed’s reaction to it,and rates going higher. Instead, the path of stocks is now about growth, and our conviction that earnings forecasts are 15-20% too high has increased.”