Trend followers stage recovery as stretched S&P, Nasdaq longs fuel gains
Investing.com -- U.S. stocks rallied on Friday, driven by gains in the technology sector, capping the week with solid performance.
The Nasdaq Composite rose 0.98% to a record 21,450.02, after touching a fresh intraday high earlier in the session. The S&P 500 gained 0.78% to finish at 6,389.45, just shy of an all-time closing high, while the Dow Jones Industrial Average added 206.97 points, or 0.47%, to 44,175.61.
All three benchmarks ended the week higher. The Dow rose about 1.4%, the S&P 500 advanced 2.4%, and the Nasdaq jumped 3.9%.
Apple (NASDAQ:AAPL) was a key driver for the tech rally, boosting both the S&P 500’s technology sector and the Nasdaq.
Shares climbed 13% over the week—its strongest weekly gain since July 2020—after the company unveiled plans to invest roughly $600 billion in the U.S. over the next four years in a move aimed at strengthening ties with President Donald Trump.
This week, fresh U.S. inflation data could challenge the stock market’s record-setting run, with some investors warning of a possible pullback after four months of steady gains that have left valuations stretched.
Tuesday’s consumer price index report for July is expected to show a 2.8% annual increase, according to a Reuters poll.
Any upside surprise could temper expectations for interest rate cuts, which have grown after weaker jobs data. Futures markets now see over a 90% chance of a September rate cut and at least two reductions this year, LSEG data shows.
Seasonal trends add to caution. August and September have been the S&P 500’s worst months on average over the past 35 years, with declines of 0.6% and 0.8%, respectively.
Investors will also be watching for signs that President Donald Trump’s tariffs are feeding into consumer prices, after June data hinted at an impact on some goods.
A hotter-than-expected CPI could prompt the Federal Reserve to delay easing.
“While the weak July payroll report materially raised the probability of a September cut in the bond market’s eyes, we may need to see a softer CPI print this week to maintain such a high probability of a cut for September,” Morgan Stanley (NYSE:MS) strategist Michael Wilson said in a note.
He said a “below-consensus result has the potential to catalyze the more durable rotation to small-cap/lower quality stocks that many have been waiting for.”
On the flip side, Wilson argued that a hotter-than-expected reading, with tariff pressure showing up in core goods, would likely prompt “quality/more defensive leadership” in the initial market reaction.
Other key economic releases this week include Wednesday’s producer price index (PPI), followed by retail sales and the University of Michigan consumer sentiment index on Friday.
Q2 earnings season enters its last stretch
As the second-quarter reporting season winds down, overall results remain strong, with solid beat rates and upward revisions. Now that the busiest period has passed, clearer sector trends are emerging.
According to RBC Capital Markets, while many companies topping consensus EPS forecasts have not outperformed immediately after results, “three sectors defying this trend” within the Russell 1000 are Energy, Health Care, and Utilities, where beats have led to stronger price reactions.
Most S&P 500 sectors have seen positive revisions to EPS and revenue forecasts, with Technology leading on both measures, followed by Communication Services and Financials.
Tech is also “the only S&P 500 sector where bottom-up consensus operating margin forecasts have moved up recently for both 2Q and 3Q,” RBC added, while overall market margin expectations have slipped.
This week, several high-profile reports will be in the spotlight, including AMC Entertainment (NYSE:AMC), Cisco Systems (NASDAQ:CSCO), JD.com (NASDAQ:JD), and Applied Materials (NASDAQ:AMAT), among others.
What analysts are saying about U.S. stocks
JPMorgan: "Given the more mixed labour market, the projections of Fed cuts are being pulled forward. Money markets are pricing in a 90% chance of a cut next month, at September’s meeting, which would be a resumption of easing after a 9-month pause.
For equities, the question is what will the cuts mean at the index level, and also for sector leadership. This is especially given the significant rebound in Cyclical sectors since April, in both the U.S. and in Europe, which has opened up a gap with bond yields."
Morgan Stanley: "We’re bullish on a 6-12 month time horizon due to a rebounding earnings and cash flow environment as discussed in detail over the past couple of months. In terms of trades, we stay long Industrials, Financials, and US over international equities. Consumer Discretionary Goods remains an underweight amid tariff pressures and weaker pricing power."
Yardeni Research: "With recent economic releases on the weak side, why have stock investors been taking the bad news in stride and pushing the S&P 500 ever higher? Dr Ed examines this question, offering four possible explanations: Investors expect the Fed to ease in September, although we’re not totally convinced the Fed will—or should. Recession fears have receded, helping to justify higher valuations. Productivity rebounded during Q2, and subdued unit labor cost increases helped to contain inflation. Finally, the Digital Revolution will continue to drive economic growth—supporting our Roaring 2020s scenario."