Stock Market Faces Big Tests After a String of Positive Earnings

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Earnings season has gone better than feared, but traders face new uncertainties this week.

Today and the next two sessions bring key news on the impact of bank failures, the U.S. debt ceiling and inflation. It’s a big change from recent weeks, when strong quarterly results pushed stocks near highs from earlier in the year.

Take Apple (AAPL). The iPhone giant reported profits and revenue well ahead of forecasts last Thursday. It also announced a new $90 billion buyback, sending its shares to their highest level since August. The broader market was down 2.6 percent on the week before the news, then cut its loss by more than two-thirds to 0.8 percent in the period between Friday, April 28, and Friday, May 5.

Biggest Gainers in the S&P 500 Last Week
Royal Caribbean (RCL)+16%
Live Nation Entertainment (LYV)+14%
ON Semiconductor (ON)+13%
Generac (GNRC)+12%
Vulcan Materials (VMC)+11%
Source: TradeStation Data

AAPL’s beat was prominent, and wasn’t the only one. FactSet reported that companies are exceeding Wall Street estimates by the widest margin since late 2021. As a result, earnings are now on pace to fall just 2.2 percent his quarter, compared with the 6.5 percent contraction forecast on April 14.

Royal Caribbean (RCL) was another big mover, jumping 16 percent as business continued to surge back from the coronavirus pandemic. Other travel names like Uber Technologies (UBER), Norwegian Cruise Line (NCLH), Marriott (MAR) and Host Hotels (HST) also surprised to the upside. Those followed strong numbers from other major companies like Microsoft (MSFT), JPMorgan Chase (JPM) and Meta Platforms (META) earlier in the reporting season.

Banks and the Fed

There were also negatives last week. The Federal Reserve rose interest rates as expected, but did little to suggest cuts later in the year. Economic data seemed to back that hawkish view. For example, wages rise 0.5 percent in April — almost twice the forecast amount. A separate report for the entire first quarter showed unit labor costs jumping 0.8 percentage point more than expected as productivity plunged.

ADP’s private-sector payrolls also exceeded estimates, along with manufacturing and service-sector readings from the Institute for Supply Management.

Regional lenders were another negative as anxieties linger following the collapses of Silicon Valley Bank and First Republic. (The fear is that high Treasury yields will draw away deposits, causing restricting credit and potentially causing more bank runs.)

Senior Loan Officer Survey

Investors worried about banks will get a key piece of information today when the Fed releases its quarterly Senior Loan Officer Survey. While typically ignored, the report will be closely studied this week for clues about how much banks cut lending in response to the crisis.

On Tuesday, President Joe Biden will meet with Congressional leaders about the raising the debt ceiling. That’s another big event with the potential to impact sentiment.

S&P 500, daily chart, with select indicators. Dotted lines mark the price range cited below.

Then Wednesday morning brings the consumer price index — a potentially important inflation reading.

This week also has more earnings. Western Digital (WDC), Palantir (PLTR) and PayPal (PYPL) report tonight. Occidental Petroleum (OXY) is tomorrow afternoon, followed by Walt Disney (DIS) on Thursday.

Charting the Market

Last week’s drop kept the S&P 500 near a trendline along the highs of last August and February. Meanwhile some short-term indicators have weakened. Moving average convergence/divergence (MACD), for example has turned negative. Price swings are also starting to widen after squeezing into a tight range.

Bears might argue the index is stalling and due for a pullback similar to previous moments like October and March. But optimists could point to strong earnings and surveys suggesting ample cash remains on the sidelines. They may see potential for a breakout — especially if the debt ceiling is resolved.

Regardless, chart watchers could be focused on the range of the last two weeks between roughly 4048 and 4187.

Biggest Decliners in the S&P 500 Last Week
Paramount Global (PARA)-28%
Estee Lauder (EL)-18%
Newell Brands (NWL)-17%
Comerica (CMA)-16%
Zions Bancorp (ZION)-15%
Source: TradeStation Data

Biotech Rally

TradeStation data shows a change in sentiment recently as money pivots toward biotechnology and away from cyclical areas. Energy and metals have struggled amid weak economic data from China. Regional banks were the top decliners again last week.

Gold miners, on the other hand, advanced as investors looked for the Fed to halt interest-rate hikes. Precious metals have also benefited from the weak U.S. dollar, thanks to hawkish policy from the European Central Bank.

Other small niche groups outperformed last week. Bulk-materials providers jumped on strong results from Vulcan Materials (VMC) and Cemex (CX). Sports-betting rallied after Draftkings (DKNG) beat estimates.

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