Key week for markets
The third quarter started with the same optimism that marked the end of the second quarter. By the week's close, the Nasdaq 100 had gained 2.5%, and the S&P 500 was up 1.3%, driven mainly by rallies in Nvidia and Tesla.
Still, this is no guarantee that things will go smoothly; risks remain, including the possibility of a correction. All that is missing are the events that could trigger it. And, as always, there is no shortage of reasons other than geopolitical ones.
This week's main drivers of markets, in particular, are macroeconomic data, Jerome Powell's speech, and, at the end of the week, investors' portfolios could be shaken by companies' quarterly results. Simply put, all eyes are on the economic calendar.
But let's take it one step at a time.
The US CPI inflation data released on Thursday showed core CPI rising by 0.1% m-o-m and 3.3% y-o-y, slightly below market expectations. This lower-than-expected inflation data may support the case for the Federal Reserve to hold off on significant rate hikes in the near term.
Last week's weak job creation data had already set the stage for potential rate cuts, but the CPI data reinforces this outlook. Despite the mixed signals from the economy – where the ISM manufacturing index fell below 50, indicating contraction, while the ISM services index remained above 50 – the overall trend suggests a slowing economy that might necessitate Fed intervention.
During his testimony before the Senate Banking Committee, Fed Chairman Jerome Powell faced considerable pressure from policymakers advocating for rate cuts, especially with the presidential election approaching. While Powell acknowledged the concerns, he emphasized the need for a cautious approach to avoid undoing the progress made in controlling inflation.
The dilemma remains: altering monetary policy could provide short-term economic relief but risks reigniting inflationary pressures. Policymakers appear focused on achieving immediate growth, often overlooking the long-term implications, including the rising national debt.
Finally, the new earnings season starts this week with Wells Fargo, JPMorgan, and Citigroup reports on Friday. In addition to the outlook and past performance, the key factors to watch are dividends and net share buybacks.
Analysts point out that US companies will have to achieve their most robust earnings growth in more than two years to meet optimistic expectations, as many argue that current prices are not in line with fundamentals.