5 Critical Stock Market Catalysts to Prepare for Next Week

The stock market has been very quiet so far this April, but that might be changing as soon as next week Read More...

The stock market has been very quiet so far this April, but that might be changing as soon as next week. There are several major events happening next week, including large-cap technology earnings reports such as Microsoft MSFT, as well as some key economic data releases. Volatility has been grinding lower, but these events may be enough to get the market moving again.

Falling Volatility

In the chart below, we can see the S&P 500 chart is bumping against a level of resistance that has posed a challenge several times in the past. Below the price chart is an indicator called the Average True Range (ATR). It is a measure of volatility that takes an average of the last 14 periods high to low range. Lower ATR means smaller ranges. You can see it is clearly trending lower and is now as low as it was at the start of 2022.

This alone doesn’t tell us anything. On one side, low volatility like we are seeing now can indicate a slow market that grinds higher, typical of steady bull markets. Alternatively, low volatility can also quickly transition to high volatility. And with the overhead resistance, and list of catalysts happening next week, I think it’s possible we will see an increase in the ATR and thus daily ranges. What the market does at the 4200 level can lead the market for the rest of the year.

Image Source: TradingView

Big Tech Earnings

Starting next week investors will get a deluge of earnings reports from some of the biggest and most important companies in the stock market. Of course, front and center is big tech.

On Tuesday, after the market closes, we will get earnings from Microsoft and Alphabet GOOGL. Then on Thursday Amazon AMZN reports. All three have had extremely strong performances so far this year, far outperforming the broad market. Following the banking crisis in mid-March, big tech experienced an immense bid, as investors flocked to them for safety. All three are currently Zacks Rank #3 (Hold) stocks, indicating mixed earnings revisions.

Image Source: Zacks Investment Research

Microsoft has had a particularly exciting year following the release of OpenAI’s ChatGPT technology, which has been integrated into a few of Microsoft’s products. The hype around AI can’t be understated and has certainly been a boon for MSFT stock, and really any company that has added AI to their press releases, AMZN and GOOGL included. Just this week Microsoft also announced that it would be developing its own AI chip to help cut the costs related to running the technology, which is a huge development.

However, as exciting as this new progress is, it may be obfuscating some more concerning data. The once exploding demand for cloud services is slowing. For all three big tech firms, the cloud has been a vital source of revenue growth, but the numbers are clearly slowing.

This shift is reflected in earnings expectations. Microsoft is expecting YoY sales growth of 3%, Alphabet 1.6%, and Amazon 6.8%. These are tepid numbers from the once unstoppable leaders of the US economy. Additionally, earnings growth for MSFT is projected to be flat, and GOOGL a -14% decline, while AMZN is expecting a 19% YoY increase.

After such a strong run this year, I have concerns about the setup going into earnings. If results next week can’t reach even moderate expectations, these giants could easily pull the market down.

Economic Data Prints

To round up next week GDP figures will be released Thursday morning, and PCE Inflation data Friday morning. Both figures have implications for Federal Reserve interest rate policy which is of course the most important factor in the market today. The prevailing narrative today paints a fairly rosy picture. Strong labor market, robust growth, and slowing inflation means the Fed may achieve its ‘soft landing.’

But like tech earnings this setup raises red flags. GDP estimates are expecting a 2.3% growth rate, which certainly isn’t a bad thing. But too much economic growth, and too tight a labor market put upward pressure on inflation.

The current narrative leads investors to believe that inflation is slowing considerably. But is it really? In the chart below we can see PCE, Core PCE, and Median PCE inflation rates. While PCE and Core PCE look to be trending lower, albeit slowly, median PCE is essentially unchanged, and hovering near its highs.

Median PCE inflation is calculated by ranking the components in the index and picking those in the middle of the distribution to measure the change. This is done instead of calculating by a weighted average of all items in the index. Basically, it smooths the results, and offers a different perspective on the rate of change in the PCE index.

This data concerns me, and I wonder if investors have become too complacent expecting a quick resumption of regular markets. These expectations have shifted interest rate markets as well, and by doing so eased financial conditions. This only further exacerbates the problem by expanding liquidity and pushing prices higher.

Image Source: Federal Reserve Bank of Cleveland

Bottom Line

Markets have been quiet, maybe a little too quiet. It was barely a month ago that Wall St was worried about widespread bank runs, further rate hikes and a recession, and now suddenly the market can do no wrong. That is a huge shift in sentiment, and narrative.

Of course, it’s possible my bearish speculations are wrong, and the low volatility upward trending market continues. I don’t like being bearish, because the market often climbs a wall of worry, but I cannot ignore this current setup.

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