Stocks rebounded on Tuesday, snapping a three-week losing streak, as investors looked ahead to a deluge of earnings reports and key inflation data that could shape the market’s trajectory in the coming months.
A notable chunk of the S&P 500 companies, more than one-third, are due to release their quarterly financial results this week, with the tech sector taking center stage. However, analyst Lawrence Fuller believes that while the tech giants may garner much attention, it’s the broader market performance that holds the key to sustaining the ongoing bull market and the health of the economic expansion.
Fuller anticipates a shift in market leadership from tech to non-tech sectors, which could cap the upside potential for the major market averages. He points to the need for broader market strength to pull the market out of the correction territory, defined as a 10% drawdown from the peak.
Adding to the market’s near-term focus, Friday’s release of the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, will be closely watched. The consensus among economists is that the core PCE rate, which excludes volatile food and energy prices, will edge down from 2.8% in February to 2.7% in March, while the headline number is expected to tick up slightly from 2.5% to 2.6%.
The Fed has repeatedly emphasized its commitment to bringing inflation back to its target of 2%, and the PCE data will provide a fresh update on the progress towards that goal. However, Fuller notes that despite the recent moderation in inflation, some market participants have raised concerns about a potential rebound, citing price increases in certain components of the index. This has led to speculation that the Fed may consider raising interest rates, a move that Fuller dismisses as “ludicrous.”
The Fed’s latest Summary of Economic Projections, released last month, maintains the view of three rate cuts this year, bringing short-term rates to a range of 4.5-4.75%. This aligns with the Fed’s expectations at the end of last year, despite a year-end estimate for the core PCE to fall to 2.6%.
Fuller finds it hard to believe that if Friday’s report shows the core rate dropping to 2.7%, the Fed would abandon its three rate cuts for 2024. He believes it’s unlikely that the Fed would simultaneously adjust its rate-cut expectations and lower its core PCE projection for the year-end.
Nevertheless, a growing number of investors are skeptical of the Fed’s rate-cut forecast, with some even predicting a rate hike or no rate cuts at all. Fuller attributes this skepticism to the robust economic growth seen in the first quarter, which some investors expect to continue for the next three quarters. However, he cautions against such projections, highlighting the lagged impact of the Fed’s monetary policy tightening over the past two years.
While consumers and businesses have shown resilience in the face of higher interest rates, Fuller believes that the full impact of the current rate regime is yet to be felt. He points to decelerating wage growth and declining excess savings levels as indicators that consumer spending growth is likely to slow down.
Fuller also notes signs of stress among consumers, such as rising delinquency rates, increased reliance on minimum credit card payments, and higher credit card balances. While these developments could raise concerns about an impending recession, Fuller emphasizes that consumers have started to experience real wage growth over the past 15 months, which helps offset depleted savings.
Additionally, he highlights the positive impact of higher interest rates on money market balances, which have been estimated to add $50 billion per month in interest income for consumers. These factors, Fuller believes, will help cushion the economy during the second half of the year, although the impact of tighter monetary policy will gradually take its toll.
The analyst expects consumer spending growth, the primary driver of economic growth, to slow in the coming quarters. This slowdown will likely have a negative impact on job growth and could potentially ease price increases in the services sector, which have contributed to the “sticky” inflation seen in the first quarter of this year.
Fuller emphasizes the need for the Fed to start lowering rates towards a more neutral level ahead of softer economic activity, as rate cuts have a similar lagged effect as rate hikes. This is why the Fed maintains its projection of three rate cuts in its Summary of Economic Projections for 2024. He reiterates that a rate hike would be an illogical move given the current economic conditions.
In conclusion, the upcoming earnings reports and inflation data will provide crucial insights into the market’s near-term trajectory. Lawrence Fuller believes that a broader market rally is essential to end the current market pullback and sustain the bull market. He anticipates a rotation from tech to non-tech sectors, which could limit the upside potential for the major market averages. While the Fed remains committed to rate cuts, Fuller cautions against complacency and emphasizes the lagged impact of monetary policy on the economy.
