The Market Is at a Tipping Point as Major News Events Hit
The Federal Open Market Committee is set to raise interest rates by a quarter point on Wednesday afternoon, and several key earnings reports are set to hit this week. Microsoft (MSFT) on Tuesday night will likely be the most important report of the week as it signals whether the recent target increases for AI-related names have been justified.
So far this quarter, the reaction to earnings has been mostly 'sell the news', but there have not been any major AI reports yet. AI has been the primary driver for the big move in the Nasdaq and Nasdaq 100, and now the market will weigh in on whether the excitement about the technology has been largely discounted or if there is more to come.
Another key issue this week will be whether the recent improvement in market breadth continues. There has been a surge in new 12-month highs as smaller stocks have finally been catching up, but will they be posting earnings reports that will attract sustained buying interest? Smaller stocks tend to report later in the quarter, so we won't see many of them for a couple more weeks.
The other news event that will hit this week is the Federal Reserve interest rate policy. There is a near certainty that there will be a quarter-point hike, but what is unknown is the degree to which the Fed will signal that another hike will hit. The current expectation is that there will be a pause after this hike, and many commentators are predicting that this will be the last hike of the cycle, but the Fed is still concerned about inflation, and the strength of the economy suggests that there will be plenty of hawkish talks until there is more economic slowing.
Technically the indexes have come off recent highs after some very frothy action, but key support is holding, and there are indications of dip-buying interest. The response to earnings and the Fed will determine if a deeper pullback is in the cards.
The bears have been dead wrong all year that economic slowing will be the catalyst that causes the market to roll over, but they have not given up on that argument and continue to anticipate a sell-the-news response. That did occur with Netflix (NFLX) and Tesla (TSLA) , but Microsoft and Meta (META) will be tested to see if the AI theme still has legs.
We have a mild start to the day as economic softness in Europe is causing bonds and the dollar to rally.
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Source: RealMoney