Last week, the S&P 500 witnessed its second consecutive weekly loss, with tech stocks feeling the heat amid ongoing inflation worries as the Federal Reserve's next policy meeting looms.
The broad index fell by 0.65% on Friday, closing at 5,117.09.
On the same day, the Dow Jones Industrial Average dropped by 190.89 points, or 0.49%, ending at 38,714.77, while the Nasdaq Composite decreased by 0.96%, finishing at 15,973.17.
Over the week, the S&P 500 saw a slight decrease of 0.13%. The Dow dipped by 0.02%, and the Nasdaq experienced a 0.7% decline.
Investors have been on high alert following a series of data releases last week.
The producer price index (PPI) for February, which measures inflation at the wholesale level, increased more than expected by economists. This development led to a roughly 22 basis point rise in the benchmark 10-year Treasury yield over the week, sparking concerns among investors that the latest economic indicators might be too robust for the Federal Reserve to consider easing monetary policy.
Speaking of which, the Fed is set to hold its two-day policy meeting on March 19 and March 20, with investors keenly awaiting the latest updates on whether Chairman Jerome Powell feels that inflation has eased enough to begin cutting interest rates later this year.
But recent economic data could throw those plans into question, and that, in turn, may result in higher long-term borrowing costs, according to a Macquarie strategist.
“I think the other issue here is not just the 2024 and 2025 [dot plot], its the other issues that the Fed is thinking about which includes that the market is too frothy,” the strategist said.
“For that reason it could signal that it thinks long-term interest rates should be higher.”
Other important economic data set to come out this week include S&P Global Services and Manufacturing PMIs, weekly initial jobless claims, and Powell’s speech.
FOMC meeting preview
In their preview of the upcoming Federal Open Market Committee (FOMC), Citi economists said they believe the Wednesday meeting will likely result in a dovish reaffirmation, with Fed officials expected to continue their path towards cutting rates this year.
Citi acknowledges that the "dots" – a chart showing each Fed official's projection for the central bank's key short-term interest rate, the federal funds rate – present a potential for hawkish risk, yet they foresee them remaining unchanged, still suggesting 75 basis points of cuts in 2024.
The committee is reportedly gaining "greater confidence," but Chair Powell is likely to maintain the possibility of rate cuts for all upcoming meetings, including the one in May, economists said.
“Despite two months of stronger core PCE inflation, Powell will likely emphasize that core PCE year-on-year has fallen below 3.0% and that officials are “not far” from gaining sufficient confidence to begin reducing policy rates,” said Citi economists.
“An “in-depth” discussion of balance sheet policy may result in the release of principles for slowing and eventually ending balance sheet reduction,” they added.
Citi expects the cap on Treasury runoff to be reduced from $60 billion per month to $30 billion per month starting in June, with the first rate cut by the Fed anticipated to occur in the same month.
Similarly, economists at UBS think that Powell is “more likely than not” to suggest indirectly that the chances of a rate cut in May are quite low. They also anticipate the first reduction in the target range to occur in June.
What analysts are saying about US stocks
UBS: “We believe price corrections in major AI beneficiaries could present investors with a buying opportunity since we expect AI companies to continue to benefit from infrastructure development and transparent corporate spending intentions. We think generative AI will prove to be the growth theme of the decade. With estimated revenue growth for the AI industry around 70% each year until 2027, we forecast strong earnings growth and higher equity prices in the coming years for the next AI leaders”
BTIG: “Last week was the first time all year when the SPX didn’t clear the high from the prior week. Also, the first time it was down three straight days since Jan. 4th. Will this week be the first meaningful break of the prior week’s low all year? Further, SPX hasn't touched its 50 DMA since last November. This isn't bearish medium-term and it’s far from the longest streak on record, but it is getting up there and so a test is likely coming sooner than later, in our view.”
RBC: “While we think it’s still fair to say that Small Cap performance has stabilized relative to Large Cap (p. 12), the outperformance that Small Caps enjoyed in November and December of last year and most of February has dissipated again. In part, we think this is due to renewed fears over inflation and when/if the Fed will cut rates since cuts tend to be a trigger for Small Cap outperformance.”
Oppenheimer: “With just one company in the S&P 500 (belonging to the consumer discretionary sector) left to report Q4 earnings results this week, the Fed’s interest rate decision announcement along with Fed Chair Powell’s comments and Q&A afterwards will be the topic of the day and the likely market mover for the week barring any unexpected catalysts in events and news items day to day.”