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Tech and Fed Expectations Set Tone

Stavros Tousios | Wednesday 06 March 2024

Some US stocks fell sharply on Tuesday, March 5, led by declines in the technology sector, particularly Apple (AAPL). Investors appeared cautious ahead of upcoming Fed and jobs data, with major indexes posting their worst day in weeks. The S&P (S&P 500) fell and the Dow Jones Industrial Average (USA 30) dropped 1% each, and the Nasdaq (US-TECH 100) declined 1.7%. The 10-year US Treasury bond yield also slid to 4.15% from 4.22% on Monday.  

In addition, the ISM PMI for services fell from 53.4 in January to 52.6 in February. While it continued to expand, marking the 14th consecutive month of growth, key indicators such as employment and new orders showed weakness. Regardless, survey respondents remained mostly optimistic about business conditions going forward.

Investors will closely watch Fed Chair Jerome Powell's Congressional testimony over the next two days starting Wednesday for clues on the central bank's monetary policy outlook and the timing of potential interest rate cuts this year.

an image of the New York Stock Exchange

Main Stock Market Drivers

The stock market fell on Tuesday, with growth and momentum stocks seeing the biggest losses. Analysts pointed to a 'risk-off' session as interest-sensitive sectors like utilities and real estate performed better. 

The Magnificent Seven tech stocks; consisting of Alphabet (GOOG), Amazon (AMZN), Apple, Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA), dragged major indexes lower from their recent record highs. However, Nvidia was the only member of the group to post a gain, up 0.86%. 

Apple and Tesla's stocks dropped over concerns about their exposure to the Chinese market. iPhone sales in China fell 24% in the first six weeks of the year, while Tesla's February sales declined 19% year-over-year (YOY). Apple also faces regulatory headwinds. However, some analysts believe Apple's correlation with the broader market is low, so the stock market could still rally. Alphabet shares fell too as investors questioned the company's progress in artificial intelligence (AI) following its failed Gemini chatbot launch. 

Besides tech stocks driving the entire market, ISM Services also showed that the US economy still faces challenges despite the high demand for Services. In particular, the employment component fell into contraction at 48, suggesting weaker job growth, while supplier deliveries occurred faster, pointing to softened consumer demand. However, inflationary pressures indicated some signs of slacking as the pricing index declined. 

Regardless, markets focused more on the negatives of the report as they reflect GDP growth better. So, if the situation continues to deteriorate in upcoming releases, the Fed might have to cut interest rates sooner rather than later. Currently, the first rate cut is expected in June or July, with the probability of May standing at just around 25%.

What to Expect from Upcoming Events

Fed’s Powell will testify before the House Financial Services Committee today, Wednesday, March 6, and the Senate Banking Committee on Thursday, March 7. He is expected to repeat a cautious stance on rate cuts and point to forthcoming economic data. In addition, Powell will also face difficult questions from both Republican and Democrat lawmakers, with the former potentially warning against cutting too soon and the latter pushing for faster rate cuts.

Whatever the case may be, the Fed has underscored the importance of inflation returning to its 2% target before making any decision about rate cuts. While CPI inflation has slowed down recently, other economic data suggest it could stay above target, leading officials to take a "patient" approach. Although Powell's testimony is unlikely to differ much from recent policymakers' stance, he is expected to lean more hawkishly given the recent exacerbated stock performance. 

The upcoming February Nonfarm Payrolls (NFP) report on Friday, March 8, will be another key event to watch, as it will provide more insight into the labour market and wage growth. Forecasts project a job growth of around 200K and unemployment steady at 3.7%. While a slowdown is expected from 353K in January, a solid job and/or wage gains could imply a tight labour market and support the Fed's stance of keeping rates higher for longer.

Outlook Likely to Depend on Economic Data

Looking further ahead, the US economy is expected to grow faster this year, driven by strong Q4 growth and a resilient labour market in January. This has prompted economists to upgrade their GDP growth forecasts to around 2% for 2024, up from around 1%. 

However, some Fed officials worry that rate cuts could spark too much growth and reignite inflation. Regardless, future performance would probably rely heavily on economic growth sustained at a high level. As long as the labour market remains strong, consumers will likely continue spending, though some slowdown is expected in the second half of the year.

According to Goldman Sachs' (GS) analysis, US companies are also very profitable. Economists at the bank expect corporate profit margins to rise slightly to 16.3% this year. However, interest rates at current levels will likely reduce corporate profit margins by around 0.1% this year. Many companies issued debt when interest rates were low, so their current refinancing needs are not pressing. 

Conclusion

US stocks fell sharply on March 5, led primarily by Apple and worrisome ISM Services ahead of upcoming Fed and jobs events. On the one hand, the "Magnificent Seven" tech stocks dragged down indexes from record highs, with Apple and Tesla falling on concerns about China exposure. On the other hand, the ISM services showed that employment index contracting and supplier deliveries were speeding up.   

With Powell expected to remain cautious on rate cuts and focus on upcoming economic data, Friday's jobs report will provide more insight as forecasts point to continued job growth. However, the outlook will likely depend on whether economic growth remains high and the jobs market stays healthy.


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