Stocks closed mixed Tuesday as market participants anxiously awaited the release of a key report on inflation tomorrow morning – as well as bank earnings and retail sales data due later this week.
Tech stocks in particular continued to waver ahead of an inflation report that could solidify another interest rate hike at the next Fed meeting. But the sector was also dragged down by slowing demand for cloud-based services, which hurt shares in the industry's biggest players.
Markets were mostly preoccupied Tuesday with the impending release of the next CPI report. The Consumer Price Index for March is due tomorrow morning, and it will surely influence what the Federal Reserve's rate-setting committee – the Federal Open Market Committee (FOMC) – does at its meeting in May.
The Federal Reserve Bank of Cleveland's "Nowcast" predicts March headline inflation to increase by 5.2% year-over-year. That would represent a slowdown from the 6% increase in prices seen in the February CPI report. On a monthly basis, March inflation is forecast to rise 0.3%, down from a gain of 0.4% in February.
March's core CPI, which excludes volatile food and energy prices, is expected to increase 5.7% annually and 0.5% on a monthly basis.
As of April 11, interest rate traders assigned a 70% probability to the FOMC raising the short term federal funds rate by another quarter of a percentage point. Should the inflation data exceed expectations, the odds of another rate hike would presumably rise even higher.
"This is the week that could tell us that the U.S. consumer is no longer showing resilience and in fact is rather weak," wrote OANDA analyst Edward Moya in a note to clients. "Core inflation is making things more expensive, retail sales might show the consumer is tapped out, and the banks might paint a picture that American savings accounts are down and credit card debt is skyrocketing."
As to Moya's last two points: traders and investors are also skittish about the beginning of the corporate reporting season. Big banks such as JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) lead the earnings calendar on Friday. With the bank crisis not yet in the rearview mirror – and some investors wondering if regional bank stocks are a buy – financial earnings will be even more closely scrutinized than usual. March retail sales are on the calendar for Friday, too.
Elsewhere in the market Tuesday, the more rate-sensitive tech sector was once again a laggard – and not only because of anxiety over the impending inflation data. Enterprise spending on cloud-based services – which soared during the work-from-home pandemic era – has been coming back down to Earth. In part, that's a natural regression to the mean, but it's also due to clients cutting costs amid heightened fears of recession.
Warnings from tech industry analysts over slowdowns in revenue from cloud-based services at three of the biggest providers weighed on shares of Amazon.com (AMZN, -2.2%), Google parent Alphabet (GOOG, -1.0%) and Microsoft (MSFT, -2.3%) Tuesday.
By session's end, the tech-heavy Nasdaq Composite shed 0.4% to finish at 12,031. The blue-chip Dow Jones Industrial Average added 0.3% to close at 33,685, while the broader S&P 500 lost less than a point to finish essentially unchanged at 4,109.
The best bets in a bad earnings season
Although consumers' can easily protect their cash and investments, investors are worried that a bank lending crunch could spark a recession later this year. And it's not just the banks that have folks concerned. S&P 500 earnings are forecast to slump 6.1% in Q1, their worst decline in almost three years, per FactSet.
With relative outperformance becoming harder to realize against such a backdrop, investors would do well to see how the best oil stocks, the best dividend stocks for dividend growth and the best ETFs might suit their needs.
