The S&P 500 and Nasdaq experienced a downturn this week, reflecting investor apprehension ahead of crucial tech earnings reports and the Federal Reserve's upcoming policy meeting. This period of uncertainty has led to increased market volatility, with major indexes showing mixed performances.
The S&P 500 and Nasdaq Composite both closed lower on Tuesday, driven by declines in megacap tech stocks. Investors are bracing for quarterly reports from industry giants such as Microsoft, Apple, Meta, and Amazon, which are expected to significantly influence market sentiment. "Investors are awaiting numerous key earnings releases and the beginning of the Federal Reserve's policy meeting," noted Scott Schnipper from CNBC.
Economic Outlook and Federal Reserve's Role
The Federal Reserve's two-day policy meeting is set to begin, with market participants keenly watching for any signals regarding the timing and extent of future rate cuts. The Fed has previously projected only one rate cut for the remainder of 2024, but traders are now anticipating a 100% chance of a September rate reduction, according to the CME FedWatch Tool. Seema Shah, Chief Global Strategist at Principal Asset Management, commented, "Inflation is trending lower, supporting Federal Reserve rate cuts. This, coupled with a still robust economic outlook and strong corporate earnings, should bolster risk assets and lead to a broadening of returns away from just technology".
Market Performance and Investor Sentiment
Despite the recent downturn, the broader market has been buoyed by tech stocks for most of the year. However, recent weeks have seen a shift as investors move towards small-cap stocks expected to benefit from anticipated interest rate cuts. On Monday, big tech names like Nvidia, Meta, Alphabet, and Tesla saw gains, while the iShares Semiconductor ETF (SOXX) rose nearly 2%.
Corporate earnings have so far been robust, with more than 40% of S&P 500 companies reporting results that exceeded Wall Street expectations. According to LSEG, 79% of these companies have posted earnings that beat estimates, compared to a five-year average of 77%. Savita Subramanian, Bank of America's head of U.S. equity and quantitative strategy, stated, "Both 2024 and 2025 consensus EPS are holding up, with 2024 EPS tracking a typical non-recessionary year revision trend. This suggests that analysts are relatively comfortable with their estimates".
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