The tech-focused Nasdaq fell more than 1% on Monday as megacap growth stocks including Apple, Amazon and Alphabet declined ahead of their earnings reports this week, while investors also awaited key central bank meetings.
The U.S. Federal Reserve is seen hiking the Fed funds rate by 25 basis points (bps) at the end of its two-day policy meeting on Wednesday, close on the heels of economic reports showing signs of slowing demand and cooling inflation.
This will likely be the smallest rate increase since the Fed kicked off its tightening cycle 10 months ago with a 25 bps hike, with financial markets pricing in a final rate hike in March.
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“The Fed’s going to continue to err on the side of caution with respect to inflation because of the fact that it still remains well above the 2% target … we’re seeing signs that inflation may be coming down, but it’s still not low enough,” said Adam Sarhan, chief executive of 50 Park Investments in New York.
Money markets now see rates peaking at 4.9% in June, still below the 5% level expected by Fed policymakers.
After a slew of layoffs by large-cap tech and financial firms through the month, investors will now watch out for the Labor Department’s January nonfarm payrolls data expected on Friday.
A total of 107 S&P 500 firms are expected to report quarterly results in the busiest week of the earnings season, including heavyweight growth companies Apple Inc, Amazon.com Inc, Alphabet Inc and Meta Platforms Inc, each down about 1%.
Analysts expect S&P 500 earnings during the fourth-quarter to decline 3%, compared with the 1.6% drop expected at the beginning of the year, according to Refinitiv data.
Wall Street is expected to end the month higher with the Nasdaq and the S&P 500 Growth index recouping more than half their monthly losses from December.
Tighter monetary policies have stood in the way of growth firms expanding their businesses, which have also been pressured for much of last year by high Treasury yields.
Analysts expect a hawkish tone suggesting that more needs to be done to tame inflation.
“With U.S. labour markets still tight, core inflation elevated and financial conditions easing, Fed Chair Powell’s tone will be hawkish, stressing that a downshifting to a 25bp hike doesn’t mean a pause is coming,” said Bruce Kasman, chief economist at JPMorgan, who expects another rise in March.
“We also look for him to continue to push back against market pricing of rate cuts later this year.”
There is a lot of pushing to do given futures currently expect rates to peak at 5% in March and to fall back to 4.5% by year end.
Europe offered a brisk reminder that the fight against rising prices is far from over, as bond yields in the region rose sharply on Monday in the wake of stronger-than-expected Spanish inflation data.
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“The month of January was a big ‘up-month’ on Wall Street, led mostly by many of the big stocks that got crushed last year,” Sarhan added, noting that the decline in growth stocks on Monday could be due to some profit-taking.
Other major central banks including the European Central Bank and the Bank of England are also seen raising interest rates later in the week.
At 10:24 a.m. ET, the Dow Jones Industrial Average was up 14.55 points, or 0.04%, at 33,992.63, the S&P 500 was down 20.90 points, or 0.51%, at 4,049.66, and the Nasdaq Composite was down 133.10 points, or 1.15%, at 11,488.61.
Countering declines on the blue-chip Dow, American Express rose 1.6% after several brokerages raised price targets on the stock on its strong full-year forecast.
Five of the major 11 S&P 500 sector indexes fell with communication services and technology leading the fall.
Declining issues outnumbered advancers by a 1.36-to-1 ratio on the NYSE and by a 1.52-to-1 ratio on the Nasdaq.
The S&P index recorded three new 52-week highs and no new low, while the Nasdaq recorded 39 new highs and eight new lows.