Stocks fell slightly today as investors prepared for Big Tech earnings, due out over the next week. The Dow traded flat while the S&P and Nasdaq Composite both slumped. Treasury yields fell, however, likely softening the morning’s tech selloff.
Up next for investors are Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), Meta (NASDAQ: META), and Microsoft (NASDAQ: MSFT) earnings. The majority of S&P stocks have beat estimates thus far, but forward guidance has been lacking as companies anticipate a coming slowdown.
If Big Tech follows suit, the market’s sideways chop of the last few weeks could morph into a bearish trend.
“Investors are, a little bit, in a wait-and-see mode: waiting to see what happens with big tech earnings this week,” said Advisor Alliance CIO Chris Zaccarelli.
On whether the indexes could go higher from here, he added:
“A lot of the good news is already in the price” of tech stocks and that “it’s going to take a lot more for tech earnings this week to really move the needle on the stock prices.”
Despite the market’s sideways movement, sentiment has remained quite bearish throughout April. That hasn’t materialized on the charts just yet, but JPMorgan analysts have a theory as to why that is and what comes next.
“One of the most puzzling phenomena of this market currently is the ongoing divergence between investor sentiment and positioning. On one
hand, judging by the various investor sentiment surveys […]
and our client conversations, investor sentiment remains firmly bearish. On the other hand, positioning amongst most investor types, continues to suggest the opposite,” read the bank’s morning note to clients.
“So what does this ongoing divergence between bearish sentiment and lukewarm positioning mean for markets? Given the propensity for the pendulum of sentiment and flows to swing from one extreme to another, a lack of exuberance lately suggests that equities could grind higher until ‘greed’ sets in more firmly or a more definitive negative catalyst shows up. That said, the positive flows and more neutral positioning does suggest that there’s greater potential for negative catalysts to drive markets lower than was the case heading into the banking crisis last month.”
Translation: if nothing happens, stocks could creep higher. If Big Tech earnings and the May FOMC don’t go over well, stocks will probably turn sharply lower.
This statement, while not necessarily all that profound, is also absolutely true. Markets are looking for a signal, good or bad, to act on.
A 25 basis point rate hike on May 3rd followed up by a hawkish post-hike Powell press conference might just be the trigger bears have been waiting for. If Fed Chairman Powell indicates that rates will be held at 5.0%-5.25% indefinitely – ie, no mention of rate cuts in the future – investors could react very poorly.
Dovish rhetoric could conversely stretch out the rally.
But how much higher could stocks go, in that case? The S&P is already up over 9% from its mid-March lows. History suggests that the short-term rally is over. If the S&P is going to march higher again, it will need to sell off first before doing so.
That’s why sentiment is so bearish, and rightfully so. But until that bearishness shows up on the charts, traders could be in for additional frustration.
Even if everyone’s anticipating a hawkish Powell next week.
