The equity markets have traded in the red for three consecutive weeks after they rebounded in March. In the last week ended on April 22, the S&P 500 lost 2.5% while the Nasdaq Composite and Dow Jones indices were down by 3.6% and 1.74% respectively.
Investors can expect stocks to remain volatile in the upcoming week as they wrestle with inflation and a string of earnings reports. In addition to the ongoing war between Ukraine and Russia, stocks have been hurt by concerns over an economic slowdown, steep valuations, rising commodity prices, and interest rate hikes, all of which are likely to result in compressed earnings for corporates in 2022.
All eyes on big tech earnings
Several tech giants such as Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), Meta (NASDAQ: FB), Amazon (NASDAQ: AMZN), and Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) are scheduled to report quarterly results for March this week. Until now, companies part of the S&P 500 have delivered stellar results and have outpaced Wall Street estimates in Q1.
However, shares of streaming giant Netflix (NASDAQ: NFLX) were down 35% in a single trading session as the company confirmed it lost 200,000 subscribers in Q1.
As big tech reports results for the quarter ended in March, market participants will be watching closely to gauge the impact of economic pressures that will hurt subscription-related businesses part of the software and cybersecurity businesses.
In the past decade, shares of subscription-based tech stocks were on an absolute tear on the back of a widening customer base. However, when a company valued at a premium, experiences moderation in user growth, its underlying stock is likely to trail the broader market by a wide margin.
Inflation will be under the spotlight
Wall Street will continue to consider the impact of inflation and rising costs as data for the personal consumer expenditure or PCE index will be released on Friday. The core PCE which is also the preferred measure of inflation by the Federal Reserve rose by 5.4% in February.
Here, the PCE excludes food and energy prices that are volatile but have gained significant momentum in the last 12-months, resulting in a subdued consumer spending environment.
According to Steven Major, the global head of fixed-income research at HSBC, “The surge in inflation would not be a problem if it was entirely generated by supply constraints, related to food and energy, but central banks cannot just sit back and wait for it to normalise.”
Wall Street has priced an aggressive outlook by the Federal Reserve in 2022. There is a chance for the Central Bank to raise interest rates by a cumulative 125 basis points by June. Jerome Powell, the chairman of the Fed explained the regulatory body cannot be complacent even though data suggests inflation may have peaked as it's critical to achieve price stability over time.
Further, in a client note accessed by CNBC, Ethan Harris, who is the global economist at Bank of America stated, “In our view, given the dovishness of this group, the Fed will only deliberately risk a recession if inflation gets stuck above 3%. Hence, rather than wait with baited breath for the next Fed speaker, we are focused on one question: is the economy on a path toward acceptable or unacceptable inflation. All the rest is talk.”
In addition to the PCE, data for the S&P/Case-Shiller home price index as well as new home sales will be released on Tuesday. It will be supplemented by the earnings of D.R. Horton (NYSE: DHI) which will provide investors with a comprehensive view of the housing market in the U.S.
Finally, preliminary data for the GDP in Q1 will be published on Thursday and will give you a hint of an impending economic slowdown.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
