For the stock market, this past week had the feel of steering out of a spin after hitting an ice patch—and driving away safely. Unfortunately, the road ahead may be even more treacherous.
That seems unfair to say. The S&P 500 gained 1.5% this past week, its second week of gains following a disastrous start to the year, while the Nasdaq Composite rose 2.4%, and even the Dow Jones Industrial Average, which has held up better than both, advanced 1%. That the market managed to finish higher despite some wild swings suggests that stocks may be ready to run. It’s not every week, after all, that we see the Nasdaq Composite drop 3.7% in one day, as it did this past Thursday after Meta Platforms
’ (ticker: FB) disastrous earnings report, and still finish the week higher.
But more obstacles loom. Some of them are technical, says Fairlead Strategies’ Katie Stockton, as the S&P 500 could be running into some resistance at its 50-day moving average, a technical indicator that can help define where a rally runs out of steam. There are also signs that intermediate-term momentum has slowed, suggesting that the next big move is lower, not higher. “That differentiates this selloff from ones in recent history,” she says. “It’s an oversold bounce under way, not something to leverage on the upside except as a selling opportunity.”
It’s easy to blame Meta’s Facebook for the weak outlook. The stock fell 21% this past week after the company reported disappointing fourth-quarter earnings and gave first-quarter revenue guidance that came in well below analyst forecasts. But it’s the reaction of stocks like Apple (AAPL) and Alphabet (GOOGL)—which leapt after their reports—that might be just as concerning. Apple, for instance, gained 7% on Jan. 28, after releasing earnings the evening before, but it has risen just 2% since then. And Alphabet? While it jumped 7.5% this past Tuesday, its stock has dropped 2.2% since.
Overall, the Nasdaq-100 has gained just 5.8% since bottoming on Jan. 27, not much of a rally considering the size of its initial drop. “It is a massive disappointment,” writes Evercore ISI technical analyst Rich Ross, especially considering the solid earnings from Apple, Alphabet, Microsoft (MSFT), and Amazon.com (AMZN), which gained 14% Friday after reporting earnings of its own.
Maybe too much is being asked of earnings. While about 80% of companies have beaten analyst earnings expectations so far, the size of those beats is the smallest since the first quarter of 2020. Worse still, analyst forecasts suggest that earnings will continue to grow at a fast pace over the next two years, says Nicholas Farr, assistant economist at Capital Economics. The problem is biggest in the tech and discretionary sectors. “Earnings expectations look particularly rosy for the consumer discretionary and IT sectors, even when compared with the historically strong pace of earnings growth in these sectors,” Farr explains.
Compounding the problem is the Federal Reserve. Tighter monetary policy is rarely good for the market’s highest-valued stocks, and policy is about to get a lot tighter. While investors have priced in a March start of rate increases, no one really took seriously the possibility of a half percentage point hike. Until Friday, that is. It wasn’t just that the U.S. economy added 467,000 jobs in January, but that November and December were revised higher by more than 700,000. With that, the chances of a half-point hike in March rose to 36.6% from 8.5% the week before.
A half-point hike once seemed like something Fed Chair Jerome Powell had dismissed at his press conference, but now seems like something investors have to take seriously. And that means playing defense over offense. Fairlead’s Stockton is recommending adding gold and products that track the Cboe Volatility Index, or Vix. Evercore’s Ross is pushing a combination of inflation beneficiaries and defensive sectors.
Don’t expect the stock market to stabilize until expectations for Fed hikes do.
Write to Ben Levisohn at [email protected]
