- Earnings give stocks one last boost before the FOMC decision
- Consumer Confidence surges to a 2-year high
- Dow eyes longest winning streak in six years
Volatility should be elevated this week as we have a key FOMC meeting and peak earnings season. So far, the trade has been for the money flow to continue go into small stocks, with some lowering their exposure to mega-cap tech trade. This earnings week has the potential to drive the recession-based pullback that seems to have evaded us this year.
US stocks have had an interesting run here as relentless Nasdaq rally has cooled, the Dow Jones Industrial Average winning doesn’t want to stop, the Russell 2000 tries to play catchup, and the S&P 500 nears record high territory.
After more than a year of Fed unity in raising rates to combat inflation, the end of the rate hiking campaign will start to see some dissent from the hawks, centrists, and doves. The voting hawks Waller, Bowman, and Logan might argue that the Fed needs to keep optionality about more tightening on the table. The voting doves are Cook and Goolsbee, who both will probably remain supportive for raising rates on Wednesday, but might show support for a long pause, that might eventually become the peak in rates. Powell and the centrists have the luxury of not overcommitting a position about the future path of rates, potentially setting up the Jackson Hole Symposium as the time to signal that they are most likely done raising rates.
US stocks are entering a consolidation phase ahead of massive earnings (Microsoft, Alphabet, Meta, and LVMH) and three big rate decisions by the Fed, ECB, and BOJ. Stocks have been mostly posting a short-term advance heading into these major market moving events and that could extend to an attempt at record highs if the Fed shows confidence that the disinflation process is firmly intact and if the mega-cap tech earnings deliver better-than-expected earnings with promising outlooks. A lot needs to go right for a longer-term rally to unfold, which might suggest we could see the Dow Jones Industrial Average and Russell 2000 outperform the Nasdaq over the short-term. If after this week, Wall Street becomes worried that the Fed is still leaning towards delivering one more rate hike, that could spook a lot of investors, which would see that as a policy mistake. If odds for a September 20th meeting rate hike end up becoming a coin flip, that could see a good portion of the recent rally with market breadth trade come undone.
