As Investors Await Big News, Market Sentiment Hangs in The Balance
By John Persinos
This week, investors face an inflection point for the equity rally.
Several leading artificial intelligence (AI) companies such as Microsoft (NSDQ: MSFT), Facebook parent Meta Platforms (NSDQ: META), Apple (NSDQ: AAPL), and Amazon (NSDQ: AMZN) are scheduled to release their quarterly earnings throughout the week.
Although market breadth is increasing, the performance of these tech giants continues to disproportionately drive the stock market rally.
Meanwhile, the Federal Reserve's policy-making Federal Open Market Committee (FOMC) is slated to announce its interest rate decision on Wednesday.
After experiencing a nearly 5% decline in mid-July, the S&P 500 appears to be stabilizing, with market leadership broadening.
Year to date, the S&P 500 has risen over 14%, compared to an 11.5% increase for the Russell 2000 index. However, so far in July alone, the Russell 2000 small-cap index has surged by approximately 10%, while the broader S&P 500 has remained relatively flat. This trend of expanding market leadership is expected to continue, emphasizing the importance of diversification in your portfolio.
All eyes are on this week's two-day FOMC meeting, concluding on Wednesday with an interest rate decision and a press conference by Fed Chair Jerome Powell. When Powell speaks, the market's reaction is usually apparent in real time. When you see him walk up to the lectern, stay alert. His words and tone carry a lot of clout.
Wall Street expects the Fed to maintain the federal funds rate at 5.25% – 5.50% this week, but Powell in his remarks probably will signal rate cuts for the latter part of the year. He can point to significant progress in curbing inflation.
The latest data shows that inflation in the U.S. has moderated, with both the consumer price index (CPI) and the personal consumption expenditures index (PCE) trending lower in recent months. The latter is the Fed's preferred inflation gauge.
In addition, the labor market has shown signs of softening, with the U.S. unemployment rate rising to 4.1%, slightly above the Fed's forecast of 4.0% for the year, and wage gains moderating to below 4.0%. This combination of easing inflation, a Fed inclined to reduce interest rates, and positive but cooling economic growth supports the ongoing stock market expansion.
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