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U.S. futures are trading higher on Monday after the U.S. equities secured a strong close to the last trading week. The S&P 500 closed 1.4% higher while the Dow Jones Industrial Average (DJIA) added 1.2%. The tech-focused Nasdaq Composite Index (IXIC) finished the week 1.65% higher.
Thanks to the outperformance of mega-cap stocks like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), the S&P 500 is up 3.4% year-to-date. However, the equal-weighted index is down about 5.5%.
With Microsoft and Apple up 17% and 23% year-to-date, respectively, BTIG analysts warn that the “clock is ticking for technology stocks as divergences grow larger.”
“We believe the risk is that these names, and therefore tech broadly, catch-down to other parts of the market and that is what ultimately moves the SPX lower.”
What happened last week?
As was the case with the penultimate week, investors were laser-focused on the banks. Stocks outperformed on Friday after staging a big drop two days earlier on fears that the global banking crisis is not over.
Late last week, investors were focused on the Deutsche Bank (ETR:DBKGn) with costs of insurance of the company’s bonds rising sharply.
“The banking turmoil is also a crisis of confidence, and these tend to take time to ease. While volatility may persist in the near term, we continue to believe that there are not yet signs of wide-scale contagion or systemic risk in the U.S. banking system,” Edward Jones analysts wrote in a regular weekly note.
The Fed hiked its key interest rate by 25 basis points, although the dovish forward forecast implies the end to the ongoing hiking cycle is near. Given that the Fed is likely to stop hiking soon, the outlook for the stock market looks more balanced now despite the increasing odds of a U.S. recession.
“A further tightening in lending standards due to banking system pressures looks set to do the rest of the Fed’s job for them, dragging on economic growth and inflation but reducing the risk of further rate hikes,” JPMorgan analysts said.
Week ahead
The banks managed to rally on Friday, helping the overall risk sentiment to improve heading into the weekend. No news over the weekend is good news, hence futures are up in early Monday trading.
As far as economic data is concerned, the key release is the core personal consumption expenditures (PCE) report on Friday.
Investors will be also closely following speeches of Fed officials, including congressional testimony by Vice Chair for Supervision Michael Barr on Tuesday and Wednesday and speeches by New York Fed President Williams and Fed Governor Waller on Friday.
On the Fed front, the market is now pricing 8 bps of hikes in May, followed by 13 bps and 23 bps of cuts in June and July, respectively. This is despite Fed Chair Powell stating last week that the FOMC doesn’t “see rate cuts this year.”
What analysts are saying about equities
Goldman Sachs analysts: “Feels like the market will continue to compartmentalize these concerns amidst the background of yield curve pricing. The shift that could pour cold water on this trade would be a move in rates or inflation expectation, but look ahead to the catalysts of NFP next week and then CPI thereafter for markets to start to re-focus on these concerns.”
Morgan Stanley analysts: “With bond markets questioning the Fed’s dot plot, bond volatility has increased markedly. We think stocks are next as investors realize earnings guidance looks unrealistic. This is when the ERP typically reprices, and stocks may finally get ahead of the downside we see in earnings estimates.”
Roth MKM analysts: “In our client conversations we still feel a large degree of pessimism for the outlook on equities. Recession is a foregone conclusion. New lows for stocks are expected… If equity correlations spike to one, we would become very concerned and frankly extremely negative, however rotation continues, and Technology remains an overweight, not simply due to relative outperformance but absolute performance as well.”
Edward Jones analysts: “We see opportunities forming in both the equity and bond space in the months ahead, beyond the more recent defensive posturing, as markets start to look past the economic downturn and toward a recovery… Investors can use near-term market volatility to rebalance, diversify and add quality investments at better prices ahead of a potentially more sustainable rebound to come.”
Jefferies analysts: “For equities, the question will be whether the drop in bond yields is enough to offset the drag on growth from tighter lending standards.”
JPMorgan analysts: “One should use the bounces to reduce exposure. We do not see these rebounds persisting, the policy mistake risk keeps building. In a nutshell, we do not expect a fundamental improvement in equities riskreward until the Fed is advanced with rate cuts.”
Fairlead Strategies analysts: “[S&P 500] short-term upside momentum is challenged by cloud-based resistance ranging up to ~4060. Importantly, the weekly MACD indicator is now on a “sell” signal after having been on a “buy” signal since early November, reflecting a meaningful loss of intermediateterm momentum. This makes it harder for the market to sustain rallies.”
