The Fed's interest rate cut expectations have changed again, and whether U.S. technology stocks can continue to turn the tide

CBN

2024-05-26 16:52Posted on the official account of Shanghai Yicai

U.S. stocks emerged from a sharp divergence last week, with the Dow, which is dominated by cyclical sectors, falling sharply, while large technology stocks led the Nasdaq and S&P 500 to extend their previous gains.

The Fed's interest rate cut prospects took a hit and triggered a sharp intraday dive, with Nvidia's strong earnings guidance leading the market to withstand volatility in risk appetite. With the VIX, a fear index that measures market volatility, updating its year-to-date lows, stock indices at all-time highs will continue to face intense competition over monetary policy and the direction of technology stocks.

Fed rate cut expectations are variable

This is a departure from Fed Chair Jerome Powell's statement at his press conference earlier this month. Judging from the minutes released last week, the Federal Open Market Committee (FOMC) can be described as "undercurrents". It is worth mentioning that several officials within the Fed have mentioned the possibility of raising interest rates.

Bob Schwartz, senior economist at Oxford Economics, said in an interview with CBN reporters that the statement about the neutral rate in the minutes is worth paying attention to and may be higher than previously expected.

The larger-than-expected recovery in several U.S. economic data has also made interest rate cuts less likely in the near term. The latest S&P Global Composite Purchasing Managers' Index (PMI) rose to a 25-month high in May, and in addition to the manufacturing industry stabilizing above the boom and bust line, the service sector also refreshed its nearly two-year high. On the other hand, as the cost of inputs rises, future goods inflation is likely to return.

As a result, U.S. Treasury yields extended their upward trend, with the 2-year U.S. Treasury note, which is closely correlated with interest rate expectations, at 4.95%, the highest level since May 1, and the benchmark 10 U.S. Treasury note rising to 4.47%, up 5 basis points for the week.

The Chicago Mercantile Exchange's FedWatch Tool shows that the market is pricing in a 49.4% chance of a rate cut at the Fed's September meeting, down from 54.8% a week ago. The probability of two rate cuts this year is less than 30%, compared to about 70% last week. Goldman Sachs earlier postponed the Fed's first interest rate cut from July to September.

Thomas Simons, an economist at Jefferies, said: "We have long expected a weakness in the labor market due to a pullback in consumption due to inflation, which will prompt companies to lay off workers in pursuit of lower costs and safeguard profits." Now it is clear to us that this will not happen at all. "Businesses are doing a great job of maintaining profits by reducing labor costs by working fewer hours and part-time jobs, rather than reducing headcount," he wrote in a note. We expect this to continue to be a theme in the future as businesses recognise that skilled labor will become increasingly scarce over time. ”

Schwartz told CBN that the U.S. economy improved after a slow start in the first quarter, "GDP will accelerate in the second quarter as consumer spending is on a solid footing, the labor market remains tight, and business investment is stable." However, he believes that the outlook for consumer confidence is mixed as inflation expectations remain high. Overall, the probability of the Fed cutting interest rates this year is very high, which will require more data in the future. ”

Can tech stocks continue to turn the tide?

U.S. stocks were mixed last week, as signs of faster-than-expected economic activity and the Federal Reserve minutes prompted investors to withdraw bets on interest rate cuts. Cyclical sectors were sold off, with energy and real estate down more than 3% and financials down 2.0%. Meanwhile, consumer discretionary, healthcare and utilities fell more than 1%.

Led by Nvidia's stellar earnings report, the technology and communication services sectors offset losses in other sectors. The AI chip giant's better-than-expected first-quarter earnings and sales and strong guidance for the current quarter have led to an increase in market capitalization of more than $150 billion, and the total market capitalization has even surpassed that of the German stock market.

Rob Haworth, senior investment strategist at Bank of America Wealth Management, believes that as U.S. stocks stabilize near the end of the session, the market believes that maybe the situation is not as bad as imagined, "The Fed should have room to cut interest rates, the economy will improve, and we will not completely collapse." ”

Anthony Saglimbene, an analyst at Ameriprise Financial, said that the market is sensitive to economic data that challenges the "Goldilocks" scenario, so Nvidia's performance is very critical. "Investors are overreacting, which tells you how sensitive the market is to economic data that challenges the narrative that the Fed will cut rates this year," he said. However, investors can see from the chipmaker's performance that the artificial intelligence theme has a foothold. ”

Funds flow upwards, and investors chose to continue buying last week. According to data provided by the London Stock Exchange (LSEG) to the first financial reporter, led by large-cap technology stocks, the net inflow of U.S. stock funds reached $9.9 billion in the past week, a significant increase from $4.1 billion in the previous week.

Sagrebini believes that investors are trying to determine whether the current level of around 5,300 points for the S&P 500 is a potential upper limit or a support area for the index to climb. In his view, the index is likely to move higher, partly due to the positive earnings profile of US companies, especially the more weighted technology stocks.

Charles Schwab wrote in the market outlook that Nvidia's highly anticipated earnings report, coupled with capital expenditure guidance from big tech companies, the optimistic AI theme still appears to be intact. At least for now, the inflection point in performance growth has not yet appeared. However, the Fed minutes and the S&P PMI reinforced expectations that interest rates will remain high for an extended period of time. Considering the market's gains over the past five weeks and the forward P/E ratio of nearly 21x, well above the 10-year average of 17.7x, pricing is now close to perfect.

The agency believes that the upcoming release of the Personal Consumption Expenditures (PCE) price index for April will be a short-term catalyst for market movements. While paying attention to inflation indicators and the trend of US Treasury yields, investors are advised to remain cautious.

(This article is from Yicai)

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