Earnings and the Federal Reserve are the next big catalysts as stocks start rallying next week

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Trader on the New York Stock Exchange, July 20, 2021.

Source: NYSE

Here comes one of the biggest market weeks of summer.

First, the Federal Reserve will meet on Tuesday and Wednesday. While no action is expected, the possible suspension of its bond program by the central bank could be mentioned. That could move the markets, because the curbing of bond purchases by the central bank is seen as the first step on the way to increasing interest rates.

Then there are about 165 S&P 500 companies that publish earnings reports, including the biggest tech companies – Apple, Microsoft, Amazon, Alphabet, and Facebook. Tesla reports, as does the industrial heavyweights Boeing and Caterpillar. There are a number of consumer names including Procter & Gamble and McDonald’s.

There is also important business news. The second quarter is expected to be the peak period for post-pandemic growth, and gross domestic product for the quarter will be released on Thursday. The Fed’s most popular inflation measure, the consumer spending inflation index, will be released on Friday.

Fresh highs for important indices

The three major US stock indices start the busy week with new closing records. The Dow closed above 35,000 for the first time on Friday. The S&P 500 gained 1% to close at 4,411.79 and the Nasdaq Composite ended the day up 1%.

“I think the wins will be the show, and if the pattern we’ve seen so far continues next week, and it’s likely that it will find a market that has the least resistance path up, and me think that’s good news, “said Art Hogan, chief marketing strategist at National Securities.

According to Refinitiv, earnings for the second quarter should rise by 78.1%.

“It’s going to be crazy,” said Hogan. “I think the magnitude of profit overruns is still underestimated, and I think that will continue next week: 87% of companies are exceeding estimates.”

Hogan said at the start of earnings season that stocks of companies that exceeded expectations didn’t respond, but now they are and this should continue. The fact that a handful of the largest market cap stocks – like Apple, Microsoft, and Alphabet – report this close together could have an impact.

“This is like the World Series of wins in the middle of summer,” he said.

Stock recovery

Investors will also watch the behavior of the markets themselves. Stocks ended the week solidly, but Monday’s painful sell-off left its mark. Some strategists say this may have been a warning sign of further turmoil as the quarter progressed.

The stocks drew on the 10-year government bond yield, which fell on Monday amid fears that the Delta variant of Covid could slow global growth. The yield hit 1.12% early Tuesday before reversing. As the benchmark return rose, stocks rallied.

For now, stocks seem poised for further gains. The Dow closed the past week at 35,061.55, up about 1%. The S&P 500 gained 1.9% over the course of the week to end at 4,411.79. The Nasdaq is up 2.8% since weekday and the small-cap Russell is up 2.1% in 2000.

Communication services, which include Internet names, performed best over the past week, up 3.2%. Tech was also strong, up 2.8%. Consumer discretionary was also a top sector, up 2.9%. Cyclical industrials and commodities lagged with slight gains and energy was slightly lower.

Scott Redler, chief strategic officer at T3Live.com, said that big tech names like Apple and Microsoft are well ahead of profits, so it will be important to see how they act.

“Some things come at a price for perfection and some don’t,” he said. “Microsoft is already at an all-time high. The price is perfect. It will be interesting to see if Apple can hold and stay above $ 150.” Apple closed at $ 148.56 per share on Friday.

Fed “Taper Talk”

Ben Jeffery, US interest rate strategist at BMO, said government bond yields could find a catalyst in the Fed. He expects the 10-year price to go down again and says it could potentially hit a low of 1.10%. The 10-year rate was 1.28% on Friday afternoon.

Strategists don’t expect much new in the Federal Reserve’s statement. They are awaiting comments from Fed Chairman Jerome Powell for guidance on the central bank’s move to reduce its quantitative easing program.

The Fed is expected to announce that it is officially talking about ending the program long before it actually begins. Many Fed watchers expect the guidance to be released in late August, at the central bank’s Jackson Hole Symposium, or later this fall.

“I think it will be interesting to see how reluctant Powell is trying to deal with the risk of the Delta variant and concerns about it,” said Jeffery.

Luke Tilley, chief economist at the Wilmington Trust, doesn’t expect much news from Powell this week. “I am really aiming for Jackson Hole as the most likely candidate for a political and communications hub,” he said. “However, next week’s meeting with some statements that indicate an improvement in the economy could create the conditions for this. They will highlight the new risks of the Delta variant, and we mean to draw attention to this risk.”

The slowdown in the bond program is important as it signals that the Fed is on its way to reversing its loose policy, including ultimately its zero rate. Tilley said it would likely take the central bank a year to wind down its $ 120 billion monthly bond purchases and then the door would be open to rate hikes.

Investors will also watch Q2 GDP to see how strong the economy is.

According to the Rapid Update from CNBC / Moody’s Analytics, a survey of economists expects growth of an average of 9.7% in the second quarter. This is expected to be the peak period for growth and the average forecast for third quarter growth is 8.3%.

Tilley said he expects growth of 7% to 7.5% in 2021.

Calendar for the week in advance

Monday

Merits: Tesla, Lockheed Martin, F5 Networks, Check Point Software, Hasbro, LVMH, Otis Worldwide, Ameriprise

10:00 a.m. New home sale

Tuesday

Fed begins 2 day meeting

Merits: Apple, Alphabet, Microsoft, 3M, Visa, Advanced Micro Devices, General Electric, Boston Scientific, PulteGroup, Raytheon, JetBlue, Archer Daniels Midland, Chubb, Mondelez, Starbucks, Hawaiian Holdings, Waste Management, Corning, Sherwin-Williams, UPS, Stanley Black and Decker, Teradyne, Cheesecake Factory

8:30 a.m. Durable goods

9:00 a.m. FHFA house prices

9:00 a.m. Case-Shiller house prices

10:00 am Consumer Confidence

Wednesday

Merits: Boeing, Facebook, Pfizer, Ford, Qualcomm, McDonald’s, Bristol-Myers Squibb, PayPal, General Dynamics, GlaxoSmithKline, Norfolk Southern, Automatic Data, CME Group, Garmin, Moody’s, Steve Madden, Penske Auto Group, Hess, Aflac, Canadian Pacific Railway, Fortune Brands, Samsung

8:30 am Preliminary economic indicators

2 p.m. Fed statement

2:30 p.m. Briefing from Fed Chairman Jerome Powell

Thursday

Merits: Amazon, Merck, Comcast, Airbus, Anheuser-Busch InBev, MasterCard, Intercontinental Exchange, AstraZeneca, Hilton Worldwide, Northrop Grumman, Altria, Hershey, Yum Brands, American Tower, Gilead Sciences, Pinterest, Deckers Outdoors, First Solar, Beazer Homes, US Steel, Molson Coors Brewing, Southern Co., Tempur Sealy, Textron, Nielsen, Valero Energy, Martin Marietta Materials

8:30 a.m. unemployment claims

8:30 a.m. GDP in the 2nd quarter

10:00 a.m. Pending home sales

Friday

Merits: Caterpillar, Chevron, ExxonMobil, Procter & Gamble, Colgate-Palmolive, AbbVie, Booz Allen, Lazard, Church & Dwight, Johnson Controls, Illinois Tool Works, Cabot Oil & Gas, CBOE Global Markets

8:30 a.m. Personal consumption expenditure

8:30 a.m. Employment Cost Index Q2

9:00 a.m. St. Louis Fed President James Bullard

9:45 am Chicago PMI

10:00 am consumer sentiment

8:30 p.m. Fed Governor Lael Brainard