The S&P 500 is up nearly 19% this year after gaining around 1% in the past week. It has risen nearly ten percentage points since June 1, over which time the U.S. government avoided a debt ceiling default and consumer prices cooled, allowing the Fed to push up rates more slowly. But the gains have been uneven.
Investors have pushed back their expectations of when a recession will begin, aided by the fact that hiring in the economy has remained strong and consumer spending remained resilient. This has allowed the Federal Reserve to pull off a tricky soft landing, which can extinguish inflation without tipping the economy into recession.
But several economic data releases this week, including the first look at second-quarter earnings, could shift momentum again. This is particularly true for the big banks, which start reporting results this week. They face the daunting task of showing that they can generate hefty profits even while fighting off inflation, said Tom Ognar, portfolio manager at Wellspring Global Investments. He added that banks that can boost their dividends or buy back stock will be the most successful.
Roughly 30% of companies in the S&P 500 are scheduled to tell investors this week how much they earned from April through June. Among them are some of the biggest technological names, such as Apple, Microsoft, and Amazon. Investors will be looking to see whether those tech giants can continue to grow and justify their lofty valuations.
The market will also get its first look at second-quarter GDP and PCE inflation figures. Both are important indicators of the strength of the economy and will help shape traders’ views about when the Fed should stop raising interest rates, according to economists.
But there are lingering concerns that even if the economy continues to grow and inflation remains in check, it may not be enough to allow the Fed to end its tightening cycle soon. That would push down stock values by undercutting corporate profitability.
But even with those concerns, many analysts still believe the stock outlook is relatively positive. They argue that if the economy keeps growing and inflation stays in check, the Fed will be more likely to cut rates next year than it was this year to try to avoid a recession. That could help support the rally that has pushed stocks to their highest levels in a year. (Reporting by Laura Martin; Editing by Susannah Fox)