What you should know this week

Stocks retreated from record highs amid pressure across the technology sector after a global technology outage sent shockwaves through the market on Friday.

The S&P 500 ended the week down about 2%, while the Nasdaq Composite dropped more than 3.5% during the week. Both indices posted their worst weekly performance since April. Meanwhile, the Dow Jones Industrial Average rose about 0.7%.

This week, critical readings on economic growth and inflation, as well as the start of big tech earnings, will determine whether the malaise continues.

On the economic data front, the preliminary reading on second-quarter economic growth is due on Thursday, followed by the June reading on the personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation, on Friday.

In corporate news, a slew of S&P 500 companies are expected to report quarterly results in a week led by Alphabet (GOOGL, GOOG), Tesla (TSLA), and Chipotle (CMG).

Inflation expectations

Last week, fresh data suggesting slowing inflation prompted markets to price in a 100% chance of the Federal Reserve cutting interest rates by the end of its September meeting.

Next week will bring another look at inflation, this time through the Fed’s favorite measure: the personal consumption expenditures (PCE) index.

Core personal spending data is due on Friday, and economists expect it to rise 2.5% in June from a year earlier, down from a 2.6% annual gain in May. Over the previous month, economists expect it to rise 0.2%, slightly faster than the 0.1% gain in May.

The release comes less than a week before the Federal Reserve’s next monetary policy decision on July 31. Markets widely expect the central bank to keep interest rates on hold.

growth screening

One of the main questions on investors’ minds is whether the economy can survive with interest rates at their tightest levels in more than two decades.

The first reading of second-quarter gross domestic product is due out on Thursday. Economists expect the U.S. economy to grow at a 1.9% annual rate in the second quarter, up from the 1.4% growth rate in the first quarter.

Michael Gapen, head of economics at Bank of America Securities, summarized expectations for next week’s data in a weekly note, writing: “The data should show healthy activity, and inflation moving in the right direction.”

Rotation signs

Since investors have become more optimistic about the possibility of several interest rate cuts this year, a shift has begun within the stock market.

The story continues

Over the past 10 days, real estate (XLRE) and financials (XLF) have led individual sector moves. Meanwhile, the market’s biggest winners over the past year, technology (XLK) and communications services (XLC), have recently been the worst performing sectors in the S&P 500.

Finally, market cap size has also declined, with small-cap companies joining the stock market rally in 2024.

The Russell 2000 (^RUT) index of small-cap stocks has gained about 8% over the past month, while the S&P 500 has gained less than 1% over the same time period, raising the debate about whether this outperformance of small-cap companies can continue.

“We believe there is scope for a continued downward pivot if interest rates remain reasonable and the Trump 2.0 trade continues ahead of the US election,” Maxwell Grynakov, U.S. derivatives strategist at UBS Investment Bank, wrote in a note to clients on Thursday.

Big Tech Earnings Are Coming

With big tech companies floundering amid market turmoil, the underlying story for some of the biggest names in the stock market will be in focus next week.

Tesla and Alphabet are scheduled to report earnings after the close of trading on Tuesday. Second-quarter results from the two members of the Fantastic Seven will provide an early read on investor appetite for the most popular stocks of 2023. Both stocks have risen by double digits over the past six months despite recent selloffs.

The question is whether the AI-powered upward trajectory can continue.

“The biggest risk we face over the next six to eight weeks is whether we are setting ourselves up for the disappointment of AI? [in earnings]“Will all AI-related deals eventually start to go away on their own?” Ryan Grabinski, managing director of investment strategy at Stratigas Research Partners, told Yahoo Finance.

The performance of Big Tech companies is likely to set the tone for earnings growth for the broader S&P 500. Earnings at four companies — Alphabet, Nvidia (NVDA), Meta (META) and Amazon (AMZN) — are expected to grow 56.4% from a year earlier, according to FactSet senior earnings analyst John Potters. The other 496 companies are expected to grow just 5.7%.

When combined, the S&P is currently on track for 9.7% year-over-year earnings growth, which would be the best quarter of earnings growth since the fourth quarter of 2021.

Weekly Calendar

Monday

Economic data: Chicago Fed National Activity Index, June (-0.06 expected, +0.18 previously)

Profits: Cleveland Cliffs (CLF), Nucor (NUE), SAP (SAP), Truist (TFC), Verizon (VZ), Zion Bancorp (ZION)

Tuesday

Economic data: Richmond Fed Manufacturing Index, July (-7 expected, -10 prior); Existing Home Sales m/m, June (-2.7% expected, -0.7% prior)

Profits: Alphabet (GOOG, GOOGL), Cal-Maine Foods (CALM), Capital One (COF), Comcast (CMCSA), Enphase (ENPH), Freeport-McMoRan (FCX), GE Aerospace (GE), General Motors (GM), Lockheed Martin (LMT), Phillip Morris International (PM), Spotify (SPOT), Tesla (TSLA), UPS (UPS), Texas Instruments (TXN), Visa (V)

Wednesday

Economic data: MBA Mortgage Applications, week ending July 19 (+3.9% prev); US S&P Global Manufacturing PMI, July, Preliminary (51.4 expected, 51.6 prior); US S&P Global Services PMI, July, Preliminary (55 expected, 55.3 prior); US S&P Composite PMI, July, Preliminary (54.8 prior); New Home Sales, MoM, June (+3.8% expected, -11.3% prior)

Profits: AT&T (T), Chipotle (CMG), Ford (F), IBM (IBM), General Dynamics (GD), Lamb Weston (LW), Las Vegas Sands (LVS), ServiceNow (NOW), Viking Therapeutics (VKTX), Waste Management (WM), Whirlpool (WHR)

Thursday

Economic data: GDP Q2, advance (+1.9% annualized rate expected, +1.4% prior); Personal Consumption Q1, advance (+1.7% expected, 1.5% prior); Initial Jobless Claims, week ending July 20 (243,000 prior); Durable Goods, June preliminary (+0.5% expected, +0.1% prior)

Profits: American Airlines (AAL), AstraZeneca (AZN), Boston Beer (SAM), Deckers (DECK), Hasbro (HAS), Honeywell (HON), Juniper Networks (JNPR), Keurig Dr Pepper (KDP), New York Community Bancorp (NYCB), RTX (RTX), Skechers (SKX), Southwest (LUV), Texas Roadhouse (TXRH), Valro (VLO)

Friday

Economic data: Personal Income, MoM, June (+0.4% expected, +0.5% prior); Personal Spending, MoM, June (+0.3% expected, +0.2% prior); Personal Consumption Expenditures Inflation, MoM, June (+0.1% expected, 0% prior); Personal Consumption Expenditures Inflation, YoY, June (+2.5% expected, +2.6% prior); Core PCE, MoM, June (+0.2% expected, +0.1% prior); Core PCE, YoY, June (+2.5% expected, +2.6% prior); University of Michigan Consumer Confidence, July, Final (66.3 expected, 66 prior)

Profits: 3M (MMM), Bristol-Myers Squibb (BMY), Colgate-Palmolive (CL), Charter Communications (CHTR)

Josh Schaffer is a reporter at Yahoo Finance. You can follow him on X @_Joshshafer.

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