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Earnings and the Federal Reserve are the next big catalysts as stocks enter the week on the upside

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

Source: NYSE

Here comes one of the biggest market weeks of the summer.

First, the Federal Reserve meets Tuesday and Wednesday. While no action is expected, there could be a mention of a possible withdrawal of the central bank from its bond program. This could shake up the markets as the reduction in bond purchases by the central bank is seen as the first step on the path to higher interest rates.

Then, around 165 companies in the S&P 500 publish earnings reports, including the biggest names in tech: Apple, Microsoft, Amazon, Alphabet, and Facebook. Tesla reports, as do industrial heavyweights Boeing and Caterpillar. There are many names of consumers, including Procter & Gamble and McDonald’s.

There is also important economic news. The second quarter is expected to be the peak period for post-pandemic growth, and the gross domestic product for the quarter will be released on Thursday. The Fed’s favorite inflation measure, the Personal Consumer Expenditure Inflation Index, is released on Friday.

New highs for the main indices

The three major US stock indices enter the busy week with new closing highs. The Dow Jones 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 profits are going to be the show, and if the trend we’ve seen so far continues into next week, and it’s likely that it will, this is going to find a market that has the least resistance. on the upside and I think that’s good news, ”said Art Hogan, chief market strategist at National Securities.

According to Refinitiv, second-quarter profits are expected to rise 78.1%.

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

Hogan said at the start of the earnings season, stocks of companies that beat expectations didn’t respond, but now they are and it should continue. The fact that a handful of large-cap stocks, like Apple, Microsoft, and Alphabet, are so close to each other could have an impact.

“It’s like the World Series of earnings in the middle of summer,” he said.

Stocks bounce back

Investors will also be watching the behavior of the markets themselves. Stocks ended the week with solid gains, but Monday’s sell-off left its mark. Some strategists say this could have been a harbinger of further turmoil later in the quarter.

The shares were inspired by the 10-year Treasury yield, which fell on Monday over fears the delta variant of Covid could slow global growth. The yield hit a low of 1.12% early Tuesday before reversing. As the benchmark yield increased, stocks rallied.

For now, stocks appear to be poised for more gains. The Dow Jones closed last week at 35,061.55, up about 1%. The S&P 500 gained 1.9% for the week, ending at 4,411.79. The Nasdaq has climbed 2.8% since the start of the week and the Russell 2000 small cap is up 2.1%.

Communications services, which includes Internet names, was the top performer over the past week with a 3.2% gain. Technology was also strong, up 2.8%. Consumer discretionary was also a leading sector, up 2.9%. Industrials and cyclicals lagged behind with fractional gains, and energy was slightly lower.

Scott Redler, strategic director of T3Live.com, said big names in tech like Apple and Microsoft are already doing well ahead of earnings, so it will be important to see how they trade.

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

Fed “conical conversation”

BMO U.S. rates strategist Ben Jeffery said Treasury yields could find a catalyst within the Fed. He expects the 10-year to start falling again and says it could potentially hit a low of 1.10%. The 10-year was at 1.28% on Friday afternoon.

Policy makers don’t expect to see much new in the Federal Reserve’s statement. They are awaiting comments from Fed Chairman Jerome Powell for advice on the central bank’s decision to phase out 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 believe the forecast will be released in late August, at the central bank’s symposium in Jackson Hole, or later in the fall.

“I think it will be interesting to see how much Powell tries to be accommodating with the risk of the delta variant and the concerns about it,” Jeffery said.

Luke Tilley, chief economist at Wilmington Trust, isn’t expecting much from Powell this week. “I am really targeting Jackson Hole as the most likely candidate for a pivotal point for politics and communication,” he said. “However, next week’s meeting could set the stage for this with statements that point us to some improvement in the economy. They will highlight the new risks of the delta variant, and that’s the risk we think they point out. “

The slowdown in the bond program is important because it is a signal that the Fed is about to reverse its accommodative policies, including eventually its key rate to zero. Tilley said it will likely take a year for the central bank to cut its $ 120 billion monthly bond purchases, and then the door is open for rate hikes.

Investors will also be watching second quarter GDP to see how strong the economy is.

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

Tilley said he expects growth for the year 2021 of 7% to 7.5%.

Calendar for the upcoming week

On Monday

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

10:00 am Sale of new homes

Tuesday

Fed starts 2-day meeting

Earnings: 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 am Durable goods

9:00 am FHFA house prices

9:00 a.m. Case-Shiller House Prices

10:00 am Consumer confidence

Wednesday

Earnings: 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 Advanced economic indicators

2:00 p.m. Fed statement

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

Thursday

Earnings: 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 am Unemployment claims

8:30 am GDP Q2

10:00 a.m. Pending door-to-door sales

Friday

Earnings: 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 am Personal consumption expenses

8:30 am Labor cost index T2

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

9:45 am Chicago PMI

10:00 am Consumer sentiment

8:30 p.m., Fed Governor Lael Brainard

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