Stocks risk a wild week with Big Tech earnings, Fed's faceoff with inflation

By Isabel Wang and Joy Wiltermuth

Abrupt swings in 'Magnificent Seven' stocks are driving market volatility. It isn't the only worry.

Wild swings in "Magnificent Seven" stocks are once again acting as a driver of volatility across U.S. equities. Investors could face more turbulence this week as the Federal Reserve takes center stage and Wall Street gears up to tackle another batch of Big Tech earnings reports.

Stocks on Friday ended a volatile week upbeat, with the S&P 500 index SPX and Nasdaq Composite COMP posting their best week of gains since early November, according to Dow Jones Market Data. The rally was helped along by Alphabet's over 10% post-earnings gain on Friday, following a selloff in megacap tech heavyweights in the previous session.

The day before, the Dow Jones Industrial Average DJIA cut what was an almost 700-point slump by nearly half before the close, as investors digested a tepid earnings guidance from Meta Platforms Inc. (META), a worse-than-expected first-quarter GDP print and signs of persistent inflation pressures. The S&P 500 also erased roughly two-thirds of its decline from earlier in the session.

While stocks may be shaking off a sharp jump in benchmark U.S. bond yields over the past two months, recent market volatility reflects rising concerns about a potential slowdown in corporate earnings growth among the highest-flying tech companies, said Thierry Wizman, global FX and rates strategist at Macquarie.

Some of those fears were "dispelled" Friday as tech stocks roared back on strong earnings reports from Alphabet Inc. (GOOGL) and Microsoft Corp. (MSFT), he said.

"If you continue to get robust earnings results, it can completely swamp what is happening in the interest-rate space," Wizman told MarketWatch via phone on Friday.

The mercurial tone has earnings from Amazon.com Inc. (AMZN) on Tuesday in focus, as well as the Federal Reserve's interest rate decision on Wednesday, Apple Inc.'s (AAPL) quarterly results on Thursday, and Friday's jobs report for April.

"We've needed the mega-cap tech companies to come through," said Liz Young, head of investment strategy at SoFi, about first-quarter earnings. "Some of them have, and some haven't."

Still, Young thinks a shift to investors being "very focused on the short-term," matters the most for markets in the week ahead, and likely will continue to be a factor until a clearer path to interest rate cuts emerges.

"It feels very whip-lashy," she said. "Investors should be aware that there probably will be more short-term swings than in a normal market."

Fed meeting in focus

While the Fed isn't expected to change its policy rate from the current 5.25% to 5.5% range at the conclusion of next week's meeting, investors will be focusing on whether there's increased emphasis on inflation staying above the central bank's 2% yearly target.

Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, said policymakers will be "stuck between a rock and a hard place" if they stay committed to a 2% inflation target.

Prices in the U.S. jumped again in March based on the Fed's preferred PCE index released Friday, signaling that progress on cooling inflation has stalled. Inflation increased 2.7% from a year ago last month, while the core gauge that strips out food and energy advanced 2.8%.

"If there's some softening in that 2% inflation target, it opens the door to at least one cut by the end of 2024," Rathbun said via phone.

"I think Powell got ahead of himself with the pivot," said Chris Diaz, co-head of Brown Advisory's global taxable fixed-income team, speaking to initial market expectations for aggressive rate cuts this year.

"Anybody telling you today they know with a high level of confidence" where inflation will be "six months from now, isn't being forthcoming," Diaz said. "It has bounced around and surprised in all directions."

Apart from the Fed, investors will be paying attention to Friday's jobs report. Economists polled by the Wall Street Journal see payrolls gaining 250,000 in April, down from over 300,000 in March. The unemployment rate is expected to remain at 3.8%.

Soft landing in question

With inflation seemingly stuck around 3%, some Wall Street heavyweights have questioned the Fed's narrative about taming inflation, while also achieving a "soft" economic landing.

JP Morgan Chase & Co. Chief Executive Jamie Dimon recently said he feels less optimistic than others about the economy avoiding a recession. A few weeks ago, Dimon warned in his annual letter to shareholders that benchmark Treasury yields BX:TMUBMUSD10Y could head to 8% or higher, in part due to inflationary pressures.

While higher yields eventually could derail the economy, risk assets look priced for continued growth. Take U.S. corporate bonds, where spreads on some top names like Apple and Microsoft have been trading negative to Treasury yields, implying they are safer than U.S. government debt.

"We kind of like cash, frankly," said Diaz at Brown Advisory, adding that shorter-term Treasury bills still offer around 5.4% yields, while 10-year and 30-year Treasury notes BX:TMUBMUSD30Y offer only about 4.7%.

"The onslaught of Treasury supply isn't ending," Diaz said. "It goes on as far as the eye can see." He sees potential unease ahead, especially with the Fed trimming its holdings each month, prompting a need for other buyers to keep apace of new U.S. debt issuance.

Treasury yields on Friday notched their fourth straight week of advances after carving out new 2024 highs in the previous session. The yield on the 10-year Treasury was 4.668%, while the policy-sensitive 2-year rate BX:TMUBMUSD02Y climbed to 4.998%.

-Isabel Wang -Joy Wiltermuth

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04-29-24 0450ET

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