By: Hal C Clarke

Investors are bracing for a pivotal week that could significantly impact the U.S. stock market’s near-term trajectory. Several key events, including earnings reports from major tech companies, a Federal Reserve policy meeting, and crucial employment data, are on the horizon, and they could shape market sentiment following a period of significant volatility, Bloomberg reported.

The rally in tech stocks, which had been driving the market for months, came to an abrupt halt in the second half of July. This culminated in a selloff that saw the S&P 500 and Nasdaq Composite Index experience their most significant one-day losses since 2022. The downturn was triggered by disappointing earnings reports from Tesla and Google-parent Alphabet.

Investors are now anxiously awaiting earnings results from other tech giants, including Microsoft, Apple, Amazon.com, and Facebook-parent Meta Platforms. These reports could further test investors’ confidence, especially if the companies fall short of expectations. This year’s impressive rallies in the tech sector have been instrumental in pushing the markets higher but have also raised concerns about potentially overstretched valuations.

Despite the S&P 500 being only about 5% below its all-time high and up nearly 14% this year, some investors fear that Wall Street’s optimism about earnings growth may be overblown. If companies fail to meet expectations in the coming months, stocks could be vulnerable to further declines.

Next week’s Federal Reserve meeting is another focal point for investors. Market participants will be watching closely for indications of whether the Fed plans to cut interest rates, which many expect to begin in September. Comments following the meeting could provide crucial insights into the Fed’s thinking, particularly regarding its strategy to ensure a soft landing for the economy.

Additionally, the employment data due at the end of the week, including the monthly jobs report, will be closely scrutinized. This data could reveal whether the recent slowdown in the labor market has intensified, influencing the Fed’s future policy decisions.

“This is a critical time for the markets,” Bryant VanCronkhite, a senior portfolio manager at Allspring, told Bloomberg, “Investors are questioning why they are paying high premiums for AI-driven businesses amid fears that the Fed might miss its opportunity to achieve a soft landing, causing a strong market reaction.”

Recent trends indicate a shift away from high-flying tech stocks towards other sectors that have lagged, such as small caps and value stocks. The Russell 1000 Value index is up over 3% for the month, while the Russell 1000 Growth index has dropped nearly 3%. Meanwhile, the small-cap-focused Russell 2000 has risen nearly 9% this month, in contrast to a more than 1% decline in the S&P 500.

Any signs that the Fed perceives a worsening economic situation could further unsettle investors, potentially disrupting the narrative of cooling inflation and resilient growth that has supported the market recently. “We think the Fed will remain data-dependent, but the data has been inconsistent,” said Matt Peron, global head of solutions at Janus Henderson Investors. Recent economic indicators have shown faster-than-expected GDP growth in the second quarter but declining manufacturing activity.

Markets are currently pricing in a strong likelihood that the Fed will begin cutting interest rates at its September meeting, with expectations of 66 basis points in total cuts by the end of the year, according to CME’s FedWatch Tool. However, the upcoming employment data could sway these expectations.