Dow Jones, Nasdaq, S&P 500 weekly preview: The end of the Fed hiking cycle?

The S&P 500 ended 0.9% higher last week to secure the highest weekly close since August last year. The index is now approaching a key 100 weekly moving average at 4203 in what would be the first test of this important technical indicator in 8 months.

The Dow Jones Industrial Average also rose 0.9%. More importantly, the index secured the first weekly close above the key descending trend line (~33800), which acted as major resistance for several months. This should be seen as a bullish sign.

Finally, strong Big Tech earnings lifted Nasdaq Composite Index 1.3% higher last week. The tech-focused index is now close to hitting the highest levels since last August.

U.S. futures are mostly flat in pre-market Monday. The biggest news of the day is that First Republic was seized by the FDIC and then sold to JPMorgan (NYSE:JPM).

Final Fed hike for this cycle?

The macro focus this week will be on the central banks. The FOMC is due to meet on May 02/03 with the decision expected on Wednesday. The European Central Bank (ECB) is due on Thursday

“Our U.S. team’s view that the Fed will hike 25 basis points with no more hikes after that. Our U.S. team lays out possible policy statement language. I doubt the statement itself or Powell’s press conference will state that they are done hiking meaning that “data dependence” will reign supreme over the summer,” Morgan Stanley economists said Monday.

They warned that a more hawkish Fed could send shares lower this week. Along these lines, Goldman Sachs economists expect the FOMC “to signal that it anticipates pausing in June but retains a hawkish bias, stopping earlier than it initially envisioned because bank stress is likely to cause a tightening of credit.”

On the economic data front, the ISM April numbers should be out today, the JOLTs report for March is on Tuesday, while the jobs report for April is on Friday.

The peak of the Q1 earnings season

Last week was the most dominant week of the Q1 earnings season. Big Tech companies were the highlight with most mega-cap stocks having now essentially recovered a meaningful amount of their losses in 2022.

“Despite the diversity in individual company commentary, aggregate 2023 consensus EPS has fallen only 0-1% across most major benchmark indexes in April (S&P 600 a bit worse) certainly better than feared so far, and better than the prior three quarters where EPS expectations dropped by 2-4% each quarter,” Raymond James analysts said.

According to Raymond James’ data, year-to-date (YTD) performance of the biggest 8 tech-focused stocks is ~+43%, on average, whereas the average YTD return of the other ~3,000 stocks is down (1%).

53% of S&P 500 companies have reported actual results so far with 79% reporting a positive EPS/revenue surprise, respectively, according to FactSet. As of Friday, the blended earnings decline for the S&P 500 is -3.7%.

The earnings calendar for this week is packed, including Apple (NASDAQ:AAPL), Pfizer (NYSE:PFE), Uber (NYSE:UBER), Advanced Micro Devices Inc (NASDAQ:AMD), Ford Motor (NYSE:F), Starbucks (NASDAQ:SBUX), Etsy (NASDAQ:ETSY), Qualcomm (NASDAQ:QCOM), and Block Inc (NYSE:SQ).

What analysts are saying about U.S. stocks

BofA: “Bearish sentiment and conservative positioning argue for tactical upside to stocks over bonds, cyclicals over defensives and risk on from here. But macro indicators like the Global Wave, elevated market valuations and global earnings revisions argue for conservatism. One of our most negative S&P 500 indicators is based on the relationship between the Fed balance sheet and market multiples, where quantitative tightening (QT) penciled in from here argues for a 15ppt decline in the S&P 500 over the next 12 months (year-end forecast of ~3700).”

Goldman Sachs: “Despite elevated macro and micro uncertainty, we continue to expect the S&P 500 will trade sideways in coming months and finish the year at 4000 (-3%). In our base case, the U.S. economy and S&P 500 earnings will continue to grow, but rising yields and elevated current valuations will cap market upside. We see two-sided risks to our target.”

Morgan Stanley: “Investors' belief in a 2H EPS recovery is growing amid a stronger than expected reporting season. Meanwhile, the recent leading macro data have slowed further. We recommend owning high operational efficiency and earnings stability stories.”

BTIG: “When we hear people say ‘the market has been so resilient’, what they really mean is the SPX and NDX. Ultimately when we look at the weight of the evidence, we remain skeptical of a full-fledged breakout given the divergences in breadth and credit as we head into a very choppy seasonal period.”

Vital Knowledge: “Earnings remain our North Star (as they should be for everyone) and the strength of Q1 results will continue placing upside pressure beneath the market… We don’t think valuations are appealing – stocks are expensive, even if one uses 2024 forecasts. However, they’re not prohibitive either.”