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Markets have had a rough time this month, but don't count them out just yet.
Monday's bounceback, buoyed by a strong start to earnings season, could mark a sea change for investors.
What's happening: US stocks slid from recent highs last week as inflation proved sticky and heightened geopolitical tensions drove major indexes to their longest slump in 18 months.
The S&P 500 and Nasdaq dropped six days in a row, the longest downswing since October 2022. The Nasdaq tumbled 2.1% on Friday as tech stocks plunged, marking its worst day since January 31.
"We've expected inflation would be on a rollercoaster," wrote analysts at BlackRock in a note on Monday. "Further escalation of Middle East tensions could see oil prices staying elevated, reinforcing higher inflation and higher-for-longer interest rates."
Those sticky inflation rates have pushed investors to slash their expectations for interest rate cuts by the Federal Reserve. They're now anticipating just one cut this year, according to the CME FedWatch tool. That's down from six at the beginning of the year.
"We question whether the slide in stocks is a blip or a bigger shift toward pricing in inflation — and interest rates — settling higher than pre-pandemic," wrote the BlackRock analysts.
That's why earnings this week are so critical for the market.
"With stocks under pressure and rate cut hopes fading, we think the bar is higher for tech firms to deliver on earnings expectations — and for other sectors to show an earnings recovery," they wrote. "US earnings updates this week will be key to see if they can keep topping expectations and buoying risk appetite in a higher-for-longer interest rate environment."
Tesla, Facebook-parent Meta, IBM, Microsoft and Alphabet all report first quarter earnings later this week.
"Big Tech earnings may determine whether the stock market avoids its first four-week losing streak in two years," wrote Chris Larkin, managing director of trading and investing at E*TRADE from Morgan Stanley on Monday.
The good news: This earnings season has been strong so far.
About 15% of S&P 500 companies have reported first quarter earnings, and nearly three-quarters of those companies have posted a positive earnings-per-share surprise. About 60% of companies have beat revenue expectations, according to FactSet data.
Analysts at Wells Fargo say they expect S&P 500 Index profits to expand for the third consecutive quarter.
But investors are nervously waiting for the Magnificent Seven, those massive Tech stocks that carry an outsized portion of market weight, to report.
FactSet estimates predict the worry is overblown, at least for most of that group.
Companies in the Magnificent Seven are expected to drive earnings higher for the S&P 500 for the first quarter, according to FactSet. Nvidia, Amazon, Meta, Alphabet and Microsoft are projected to be the top five contributors to year-over-year earnings growth for the S&P 500. The other two Magnificant Seven stocks are Tesla and Apple.
The bad news: Other economists aren't as certain that things will go well for Big Tech this quarter.
Analysts at Bank of America wrote that they expect Magnificent Seven earnings to slow compared to last year and that they expect all seven companies to see decelerating growth when measured by earnings per share.
Others are lukewarm on Big Tech and the hype around artificial intelligence.
"With AI, we're not at the craziness of the 1990s dotcom bubble just yet – but it is starting to feel a little bit like that," wrote Dave Sekera, chief US market strategist at Morningstar in a note on Monday.
"I think what you're really going to start hearing this quarter and maybe the next couple quarters is a lot of talk about AI. As an investor, you need to have a skeptical ear regarding those companies that talk about AI but don't necessarily have a clear path as to how AI is going to either bolster their results or expand their margins."
Overall, for big tech, he said "I think this quarter is one of those where no new news is good news."
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