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The S&P 500 experienced its worst performance in about five months last week. The index lost 2.27% – the largest pullback since the week of March 6. The culprit was Fitch downgrading the US government’s credit rating from AAA to AA+ based on governance issues and a general disinterest from the political class in tackling the federal deficit.
This week will see the market getting another look at the inflation picture. The US Consumer Price Index (CPI) for July arrives on Thursday morning; and the Producer Price Index, the following day. Analysts expect prices to continue disinflating, so an uptick in inflationary pressure from either of these data sets could send the index lower still.
At Monday’s open, the market seems more optimistic. The S&P 500 advanced 0.5%, while the NASDAQ Composite gained 0.12% and the Dow Jones Industrial Average tacked on 0.8%.
The US Bureau of Labor Statistics will release July’s Consumer Price Index data one hour before the market opens on Thursday. Analysts expect the all-important core inflation reading to come in at 4.7% YoY. This compares to June’s reading of 4.8%. July’s monthly core CPI is expected to grow at 0.2%, in line with June’s rate.
Headline CPI, which contains the more volatile food and energy prices, is expected to tick higher from June’s 3% YoY rate to 3.3% in July. This is because Oil prices have been making steady headway since early July. In the past month, West Texas Intermediate (WTI) has climbed from the low $70s to the low $80s, adding costs to producers and suppliers throughout the US economy.
On Friday comes Producer Price Index (PPI) data for July. Wall Street consensus expects the core data to rise 2.3% YoY, down from 2.4% in June.
The inflation data is important, because institutional investors are worried about sticky inflation forcing the Federal Reserve to raise interest rates at its September meeting. Right now, the market feels confident that the central bank will keep rates flat. In fact, the CME FedWatch Tool gives an 84.5% chance the central bank keeps rates flat.
Higher rates would spook the equity market and assuredly lead to a sell-off in the S&P 500, and the only way that happens is if the inflation data on Thursday and Friday come in hot.
The second-quarter earnings season is coming to an end, but several quite important companies are yet to report. Chief among them are the beleagured Alibaba (BABA), which has been trading at a depressed valuation for more than two years now. Then there is United Parcel Service (UPS), which has just completed a new deal with its carrier union but has been losing overall shipping market share for several years.
Eli Lilly (LLY), which has been benefitting from the American consumers’ newfound love of weightloss drugs, and Palantir Technologies (PLTR) should both offer investors a decidedly upbeat outlook.
Palantir will report earnings after the market closes on Monday. Wall Street is expecting $0.05 in adjusted earnings per share (EPS) on revenue of $533.9 million.
On Tuesday, Eli Lilly is expected to unleash adjusted EPS of $2.00 on revenue of $7.61 billion. At the same time, UPS has a consensus for $2.50 in GAAP EPS on revenue of $23.12 billion in sales. Analysts have heavily revised expectations for the quarter much lower over the past three months.
Two more large downtrodden stocks will bring in the rear of the week’s results. First, on Wednesday, Disney (DIS) – now back under the care of Bob Iger – is expected to report adjusted EPS of $0.99 but for broader GAAP EPS just $0.05. Revenue is expected to arrive at $22.54 billion. Then Alibaba results come before the market open on Thursday. Wall Street expects $2.02 in adjusted EPS on $31.48 billion.
Monday, August 7 - Tyson Foods (TSN), Lucid Group (LCID), Paramount Global (PARA), Palantir Technologies (PLTR).
Tuesday, August 8 - Eli Lilly (LLY), United Parcel Service (UPS), Coupang (CPNG), Li Auto (LI), Datadog (DDOG).
Wednesday, August 9 - Disney (DIS), Trade Desk (TTD), Roblox (RBLX), Wynn Resorts (WYNN), Brookfield Asset Management (BAM).
Thursday, August 10 - Alibaba (BABA), Ralph Lauren (RL).
JPMorgan Private Bank senior markets economist Stephanie Roth, in an interview with Yahoo, said that the market’s lack of concern in the summer and general optimism could end up hurting investors over the near term.
The S&P 500 broke below the 30-day Simple Moving Average (SMA) last Friday. This was unexpected as the index has been rising above its 9-day counterpart for a while now, and traders might have expected the index to find support at 4,500. The 50-day SMA closer to 4,400 now seems like a reasonable level to test. Further support lies at 4,325 and 4,300.
Even a move down to the 4,100 to 4,200 volume range could be in the cards. The Moving Average Convergence Divergence (MACD) has already turned bearish by rolling over below the orange signal line. The blue MACD line at 34 will spook traders if it breaks below the zero threshold, but a lot would probably have to go wrong for that to happen.
S&P 500 daily chart
