Federal Reserve Chairman Jerome Powell is expected to emphasize the Fed will continue to be patient and hold back from raising interest rates, but there is a risk the Fed could inject some volatility into markets in the week ahead.
The Fed meets Tuesday and Wednesday, in a week heavy with earnings news and some key economic reports. Friday's employment report tops the list of data releases, but there is also PCE inflation Monday and monthly vehicle sales Wednesday. There are more than 150 S&P 500 companies reporting earnings, including Apple, Alphabet and drug majors Merck and Pfizer.
"I don't think the Fed is going to signal any big change in its policy stance next week. If anything, they will talk about how the economy is showing signs of improvement and therefore, it is appropriate to remain patient and see how things evolve," said Mark Cabana, head of short U.S. rate strategy at Bank of America Merrill Lynch.
Fed officials are sure to discuss Friday's surprisingly strong report of 3.2% economic growth in the first quarter, much better than the 2.5% pace expected by economists. It is also far better than the flattish growth forecasts and recession fears that cropped up during the first quarter when data looked spotty and the government was closed for five weeks.
"I'm sure it's going to heat up the internal debate on what the direction of policy should be," said Ward McCarthy, chief financial economist at Jefferies. Economists expect the Fed to retain its dovish tone even with the better U.S. data because uncertainty remains about global growth, particularly from Europe.
But some stock traders have been concerned with stocks near record highs, that the Fed may not want to sound quite as dovish, as it did after its January and March meetings when it 'pivoted' its policy to remove rate hikes from the forecast this year.
"There's some scope for disappointment there," said Cabana.
But then the Fed, and markets, have focused on the lack of inflation and the fact that will keep the Fed in an easier policy stance. Some market pros are counting on interest rate cuts, before the Fed ever hikes rates again.
The Fed has targeted a 2% inflation rate. Core PCE inflation for the first quarter fell to a 1.7% pace, year over year, from 1.9% in the fourth quarter. March inflation data is released on Monday.
"Our view has been and continues to be that the constant undershooting of core PCE that was again confirmed today is something that has the Fed perplexed, which is central to our theses that the Fed is going to cut rates later this year," said Julian Emanuel, head of equity and derivatives strategy at BTIG. He expects the Fed to cut interest rates in both September and December.
Emanuel also pointed out that first quarter GDP contained some transitory factors like a positive impact from trade and inventories that are not recurring, and inventories could even detract from second quarter growth. But some economists expect consumers to become a stronger force in the second quarter and make up for some of that.
Emanuel said he expects the which surpassed its previous closing high of 2,930, in the past week, to reach a high of 3,000 this year. The S&P is up more than 3% in April so far, and earnings season has been mostly positive for stocks.
The S&P 500 gained 1.2% in the past week, closing Friday at 2,939, just under its all-time intra-day high of 2,940, from Sept. 21. The Nasdaq was up 1.9% for the week at a new closing high of 8,146. But the Dow was down 0.1% for the week, ending at 26,543, still 1.5% below its intra-day high.
The first quarter earnings season was expected to be the first negative quarter for profit growth in three years, but as of Friday, earnings growth looks to be flattish, based on actual numbers for companies that have already reported and estimates for others, according to Refinitiv.
According to Emanuel, the coming week's earnings will be important, and now there are reports from big pharma. He said health care has become more attractive to him as it has come under pressure this year.
"If you look at the rebound, that is only four months old, the easy money has been made and the easy money has been made in technology," he said. "From our point of view, we like the places investors have had a more difficult time." He said two of those sectors are health care and financials.
"With regard to technology there has been an element of performance chase that has crept into the market," he said.
Technology, since the start of the year, has been the best performing of the major S&P sectors, with a gain of 26%. Financials are up 18.4%, and health care is the worst performing sector, up just 2.5%
"If you think about part of the reason the health care sector has been under such intense pressure recently, it is the expectation that legislatively, not only are prices rising less, but you could also have an element of deflation in that sector. Our view point is that is not likely to materialize," Emanuel said. "We see the weakness in healthcare as much more a function of the majority of the universe is frightened by Medicare for all, and those that aren't are frightened by the prospect of the Affordable Care Act being repealed. We don't see either of those happening."
Emanuel said he's currently being selective in buying stocks, especially given risks to the market like unresolved trade talks between the U.S. and China; the slowdown in Chinese stimulus and weaker growth, particularly in Europe.
Earnings: Alphabet, Restaurant Brands, Loews, CNA Financial, Continental Resources, MGM Resorts, Canadian National Railway, NXP Semiconductor, AK Steel, Ethan Allen, Leggett and Platt, Texas Roadhouse, Transocean, Molina Healthcare, TrueBlue, Vornado Realty Kemper, Diamond Offshore
8:30 a.m. Personal income/spending
Fed begins two-day meeting
Earnings: Apple, Amgen, Merck, Pfizer, General Motors, General Electric, ConocoPhillips, Mastercard, McDonald's, Arconic, Corning, Encana, Eaton, Seagate Technology, Blue Apron, Chubb, Ingersoll-Rand, HCA, KKR, Vertex Pharma, Akamai, FireEye, Groupon, Advanced Micro, Mondelez, Samsung
8:30 a.m. Employment cost index
9:00 a.m. S&P/Case Shiller
9:45 a.m. Chicago PMI
10:00 a.m. Pending home sales
Monthly vehicle sales
Earnings: BP, GlaxoSmithKline, Clorox, CME Group, Estee Lauder, Royal Caribbean, Humana, Hilton, AMC Networks, Scotts Miracle-Gro, Sealed Air, Entergy, Johnson Controls, Yum Brands, Qualcomm, Host hotels, Allstate, American Water Works, Apache, Hartford Financial, Square, Suncor, Williams Cos, American Financial Group, Metlife, Marathon Oil, Cheesecake Factory, Fitbit, Owens-Illinois
8:15 a.m. ADP employment
9:45 a.m. Manufacturing PMI 10:00 a.m. ISM Manufacturing 10:00 a.m. Construction spending 2:00 p.m. Fed statement 2:30 p.m. Fed Chairman Jerome Powell briefing
Earnings: Dow, Volkswagen, Delphi Automotive, Shake Shack, Tableau Software, Weight Watchers, U.S. Steel, Discovery, Kellogg, PG&E, Generac, Dunkin Brands, Wayfair, Under Armour, Cigna, Church and Dwight, Sotheby's, Gilead Sciences, Activision Blizzard, Yeti, Schneider, Kimco, Expedia, Monster Beverage, Motorola Solutions, Fluor, Con Ed, Eldorado Gold, Beazer Homes
9:30 a.m. Initial claims
8:30 a.m. Productivity and costs 10:00 a.m. Factory orders
8:30 a.m. Employment
9:45 a.m. Services PMI 10:00 a.m. ISM nonmanufacturing
Earnings: Berkshire Hathaway