Last week, the U.Sstock market concluded a period of correction that had persisted since April, thanks in large part to robust earnings reports from tech giants Google and MicrosoftThese results invigorated the tech sector, overshadowing concerns about rising inflation metrics that sparked fears of interest rate hikes.

Looking ahead, an important meeting of the Federal Reserve is scheduled for this week, with capital flows indicating a continued outflow from U.Sequity funds for the fourth consecutive week due to concerns surrounding potential rate cutsAdditionally, the forthcoming earnings reports from several tech companies will continue to test the sustainability of the ongoing AI hypeThe persistent high yields on U.STreasury bonds will likely prolong uncertainty in the stock market as the month draws to a close.

The Federal Reserve appears to be facing new challenges

Recent data showed that the U.Seconomy grew at the slowest pace in nearly two years during the first quarterWhile consumer spending remained strong, increased imports widened the trade deficit, coupled with a slowdown in inventory accumulation and decreased government spending which collectively dragged down GDP growth.

However, inflationary pressures are reinforcing market expectations that the Federal Reserve will refrain from cutting interest rates before SeptemberThe core Personal Consumption Expenditures price index (PCE), which excludes food and energy, rose by 3.7% in the first quarter, significantly higher than the previous quarter’s rate of 2.0%. Subsequent data released showed an uptick in overall PCE, accelerating by 0.2 percentage points to 2.7%, while the core PCE held steady at a growth rate of 2.8%.

In an interview, Bob Schwartz, a senior economist at Oxford Economics, stated that trade imbalances have been a significant drag on the economy

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Robust consumer demand could keep the trade deficit high, which may, in turn, continue to impede economic growthThough he believes the impact of these factors may gradually lessen over time, he maintains that the backdrop of inflation presents challengesSchwartz noted that the March PCE data largely aligned with expectations, emphasizing that seasonal factors from early in the year influenced the first quarter's results and expressing hope for stabilizing inflation metrics.

Meanwhile, the long-term trend for U.STreasury yields continues upwardThe two-year Treasury yield is hovering close to the psychological 5% threshold, with the benchmark 10-year yield rising almost 48 basis points this month to 4.67%. According to futures trading, there is a 70% chance the Fed will hold rates steady in July, with a slightly lower probability of just under 60% for a cut in September.

As the Federal Reserve prepares to meet, Chairman Jerome Powell appears to have adjusted his outlook regarding the timeline for potential rate cuts, suggesting that rising inflation may delay any such decision

This perspective seems to echo sentiments held by several members of the Federal Open Market Committee (FOMC).

Olu Sonola, Managing Director of Economic Research at Fitch, commented that recent economic data has been mixedIf growth continues to slow while inflation ramps up, expectations for Fed rate cuts in 2024 may begin to feel increasingly distantJussi Hiljanen, Chief Rates Strategist at SEB Research, observed that the substantial repricing in the Treasury market this year, especially in April, was driven by a "perfect storm” where strengthening economic indicators and rising inflation coincided with hawkish rhetoric from the Fed.

Schwartz indicated that it is difficult to envision the Federal Reserve feeling confident enough to enact rate cuts soonHe anticipates Powell will face inquiries regarding the implications of inflation on interest rates and whether the Fed might consider rate hikes

He believes Powell will likely maintain that the monetary policy must remain flexible, holding the line on the prospect of rate cuts this yearSchwartz posited that the Fed might cut rates in September and December.

Despite facing uncertainties related to inflation, the market found support last week from various sectors reporting optimistic earningsThe S&P 500 and Nasdaq indices broke their streak of consecutive downturns since April, achieving their largest weekly gains since early November 2023.

Currently, the S&P 500 component stocks are expected to report a year-over-year earnings growth rate of 5.6% for Q1 2024, a notable increase since the start of the earnings seasonApproximately 78% of companies exceeded analyst profit expectations, with the communications services sector reporting a remarkable 90%, and the technology sector close behind with an 88% surpassing rate

These two sectors also posted significant gains last week, with AI industry leader Nvidia seeing over a 15% surge to recover earlier losses for the month.

Tom Plumb, President and Chief Portfolio Manager at Plumb Funds, remarked that the earnings reports from Microsoft and Google alleviated concerns regarding Meta's expenditures on data centers and AI, which could have pressured profitsBoth Google and Microsoft indicated that they expect margins to expand according to their current capital plans, alleviating many worries tied to growth in data computation.

According to data from LSEG provided to the press, a cooling of expectations for Fed easing led to a net outflow of $1.2 billion from U.Sequity funds last week, marking the fourth consecutive week of investor withdrawalsAlthough the pace of selling has slowed, prevailing optimism regarding major tech companies provided some market support

Conversely, there was a reversal in capital flight from money market funds, which saw a net inflow of $5.6 billion.

In the upcoming week, earnings reports from tech giants Apple and Amazon are anticipated to attract market focusMichael Hartnett, a prominent strategist at Bank of America, emphasized that the U.Smarket continues to depend on a handful of mega-cap stocks for direction until real interest rates rise, causing sentiment around recession concernsBank of America’s statistics reveal that the ten largest U.Sstocks account for a record 34% of the S&P 500's market capitalization, while the ten largest global stocks represent a record 23% within the MSCI Global Index.

Charles Schwab noted that the leading factors behind the market’s rebound were technical indicators of overselling and the impressive earnings results from large tech companiesWhile ASML's results were lackluster, and no substantive guidance was offered by Advanced Micro Devices, current earnings reports still point toward strong industry investment.

The firm suggests that the market will remain influenced by multiple uncertainties, with investors turning their attention to earnings from Amazon, AMD, and Advanced Micro Devices for insights into AI technology and investment developments, alongside the Federal Reserve's decision and nonfarm payroll reports