A Fed meeting, jobs report, and more Big Tech earnings: What to know this week

Stocks rebounded as tech earnings spawned a market rally despite growing concerns that the Fed will hold interest rates higher for longer. The Nasdaq Composite (^IXIC) rose more than 4% last week, while the S&P 500 (^GSPC) popped almost 3%. Meanwhile, the Dow Jones Industrial Average (^DJI) rose less than 1%.

In the week ahead, a Fed meeting, the April jobs report, and earnings from Big Tech stalwarts Apple (AAPL) and Amazon (AMZN) will test the recent optimism in markets.

The calendar also includes updates on job openings, activity in the services and manufacturing sectors, and consumer confidence.

Companies reporting earnings include AMD (AMD), Coca-Cola (KO), Eli Lilly (LLY), McDonald's (MCD), Novo Nordisk (NVO), Starbucks (SBUX), and Super Micro Computer (SMCI).

An update from the Fed
The Federal Open Market Committee's latest decision on interest rate policy is likely on Wednesday. It will be followed by a media press conference with Fed Chair Jerome Powell. Markets widely expect the central bank to hold rates steady.

Investors will be closely listening for how the Fed is interpreting recent hotter-than-expected inflation data given that the market has scaled back its rate cut expectations.

"Another round of elevated inflation data is likely to lead to a more hawkish-leaning message at the May FOMC meeting," Deutsche Bank chief US economist Matthew Luzzetti wrote 

in a research note on Friday. "While we expect the Committee will maintain an easing bias, we also anticipate the statement and press conference will echo Chair Powell’s view that firmer inflation prints suggest it will take longer to gain confidence about disinflation."

Since Powell said publicly on April 16 that inflation was taking "longer than expected" to fall to the Fed's 2% target, data on price increases has come in above expectations. Most recently, the core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 2.8% over the prior year in March, above estimates for 2.7% and unchanged from the annual increase seen in February.

After the print, investors were pricing in just a 33% chance that the Fed cuts rates in July, down from an 83% chance a month ago, per the CME FedWatch tool.

A look at the labor market
With the Fed committed to holding rates higher until it feels confident inflation is coming down, there is a continued focus on the health of the labor market. Resilient data has economists hopeful inflation can fall to 2% without the economy slipping into recession despite a higher interest rate environment.

The April jobs report is expected to show 250,000 nonfarm payroll jobs were added to the US economy, with unemployment holding steady at 3.8%, according to data from Bloomberg. In March, the US economy added 303,000 jobs while the unemployment rate slipped to 3.8%.

And, largely, economists don't expect there to be any signs of cracks in the strong labor market story.

"We don't expect the recent momentum in the labor market to slow," BofA US economist Michael Gapen wrote in a weekly note to clients on Friday.

Big Tech earnings roll on
The market's reaction to Big Tech earnings has been a mixed bag thus far. Meta's (META) plans to spend heavily on artificial intelligence, along with its softer-than-expected second quarter revenue guidance, gave investors pause. The social media giant's stock fell more than 10% following its earnings release.

Alphabet (GOOG, GOOGL) proved to be the winner of the week: Its stock popped more than 10% after the company announced a cash dividend program of $0.20 per share, approval for a $70 billion share repurchase program, and earnings results that topped estimates. Its market cap topped $2 trillion on Friday.

Baird technology desk sector strategist Ted Mortonson reasoned that a large reason behind the divergent moves in the two Big Tech stocks was a "game of positioning." Meta stock had soared over the past year, while Alphabet didn't outperform by nearly as much.

This narrative will be put to the test once again this week, when Apple and Amazon are scheduled to report earnings. Apple enters its report with shares down more than 11% this year amid growing concerns over a slowdown in demand. Meanwhile, Amazon is up more than 18% this year and hovering near an all-time high.

Earnings scorecard
Beyond Big Tech, this week will wrap up the two busiest weeks of reporting for the S&P 500. With 46% of the index having already reported for the quarter, the index is tracking for earnings per share growth of 3.5%, slightly above the 3.2% expected prior to the start of earnings season, per FactSet.

At large, companies that beat on earnings per share and revenue are seeing muted positive stock reactions, while companies that miss are seeing more negative stock performance than usual.

Strategists have told Yahoo Finance it seems companies are struggling to impress investors and drive big stock reactions after a massive market rally to start the year.

"You don't just need a beat [on earnings and revenue estimates] and hold [on guidance], you need a beat and raise and confidence in the very long-term trajectory of these companies," Citi strategist Drew Pettit told Yahoo Finance.

Still, there has been a silver lining in earnings reports thus far: Profit margins are increasing. The S&P 500 is pacing for a net profit margin of 11.5% this quarter, above the 11.2% seen last quarter and in line with where margins were a year ago.

As Truist co-CIO Keith Lerner noted in the Yahoo Finance Chartbook back in January, a key question for investors in 2024 has been whether or not corporates will be able to preserve margins amid sticky inflation and high interest rates. For now, the answer appears to be yes.