- Strategists are looking for signs in the coming week that the stock market could be bottoming, but warn the path could be difficult.
- Earnings reports from a slew of retailers — including Costco, Macy's, Nordstrom and Best Buy — take on more importance following earnings misses from Target and Walmart.
- "It will be absolutely vital for the broad market to respond in a positive fashion to whatever those retailers report," said one strategist.
If there's more bad news from retailers in the coming week, that could be a negative catalyst for an already cranky stock market.
Market pros are watching for more signs that stocks could be bottoming, though strategists say that is a tricky prospect and there could be false signals.
The S&P 500, on an intraday basis Friday, broke through its prior low to reach bear market levels - trading more than 20% below its record high reached in January. But it did not close there. Instead, it reversed the day's steep losses and ended the day just slightly positive.
"It is a process. ... This week was scary in breaking through last week's bottom. These things take time," said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI.
Emanuel said that taking out the lows could signal a buying opportunity, and that the market is in a bottoming process. "Looking medium to longer term, toward the end of the year, we continue to see higher stock prices ahead," he said.
Stocks were lower in the past week, despite the fact strategists had been expecting the oversold market to bounce. The market initially rallied, until earnings misses from Walmart and Target blew up the gains.
The surprising weakness in those two big stalwart retailers crushed their stocks, hammered the retail sector and took the entire market lower on fears the consumer is wobbling and other companies will also have earnings issues.
Earnings from Costco, Best Buy and others, as well as personal consumption expenditures data, could be important in the coming week as investors weigh how much the consumer is stumbling. The PCE includes data on spending, income and inflation.
The S&P 500 Friday dipped into bear market territory when it fell under 3,837.24, but did not close there. Some Wall Street pros consider it a bear market if a 20% decline is reached in an index on an intraday basis, but others insist the index must close at that level in order for the bear market to be effective.
Regardless, it's the biggest downturn of this magnitude since the swift bear market decline in March 2020 at the start of the pandemic.
"This is another step in the bottoming process, but we're going to need follow through. You're getting a slew of retailers reporting next week – the place that is under the largest microscope of investors, given the blowups we saw this week," said Emanuel. "It will be absolutely vital for the broad market to respond in a positive fashion to whatever those retailers report."
While there is no official determination on what a bear market is, strategists so agree that the extent of the bear market, or how far stocks could fall, depends strictly on the performance of the economy.
"The whole thing comes down to whether or not there's going to be a recession. In the last three bear markets, where there was no recession, the decline was 21.3% and we're basically there," Emanuel said.In the last three bear markets when there as a recession, the average decline was 47.9%, he said. Those bear markets were in 2000, 2008 and 2020.
Other retailers reporting earnings in the coming week include Ulta Beauty, Macy's, Dick's Sporting Goods, and discounters Dollar Tree and Dollar General. Their reports and comments could help clarify whether the consumer is more broadly weakening, and how much inflation and supply chain snarls continue to hurt the stores and the economy.
"Any retailer reporting in this environment is a reason for an investor to be fearful, given what we've seen this week," Emanuel said.
The reports from Walmart and Target came as the market was also assessing a very strong April retail sales report, showing spending jumped 8.2% year over year.
In the coming week, the economic calendar includes the Federal Reserve's minutes from its last meeting on Wednesday, the second look at first quarter gross domestic product Thursday, as well as PCE data on Friday. The PCE data also includes the PCE inflation index, watched closely by the Fed.
"We're likely to shift gears to focus on economic data. We get the April read on new home sales, which looks to be down but not as much as it was in April," said Art Hogan, chief market strategist at National Securities. "We get durable goods, and that's likely to show improvement as well. One thing that's been consistent is the data and the economic calendar has been better than the market's reaction to it."
Stocks took a battering in the past week, with the S&P 500 down 3% to 3,901. The Nasdaq was bloodied even more, declining 3.8% as some big cap tech favorites cratered. Apple was down 6.4% on the week, and Tesla fell 13.7%.
Emanuel said investors should continue to stay defensive. "This is an environment where you have to look for all the edges you can, which is projected better earnings growth, depressed multiples and high short interest," he said. When a stock has a high short position, meaning investors expect the price to fall, any move higher in price could force those investors to cover shorts, propelling the stock price to even better gains.
Emanuel said he also likes value names. "Long term, it's a very very viable area of the market," he said. Emanuel added that value stocks are under-owned by individuals, and he said the are a hedge in a rising rate environment and also against inflation.
Week ahead calendar
Earnings: Zoom Video, Advance Auto Parts
12:00 p.m. Atlanta Fed President Raphael Bostic
7:00 p.m. Kansas City Fed President Esther George
9:45 a.m. S&P Global Manufacturing PMI
9:45 a.m. S&P Global Services PMI
10:00 a.m. New home sales
12:20 p.m. Fed Chairman Jerome Powell speaks at National Center for American Indian Enterprise Development summit
8:30 a.m. Durable goods
12:15 p.m. Fed Vice Chair Lael Brainard
2:00 p.m. FOMC minutes
Earnings: Costco, Macy's, Autodesk, Gap, Dell Technologies, Dollar Tree, Dollar General, Ulta Beauty, Lions Gate, VMware, Baidu, Alibaba, Medtronic, Burlington Stores, American Eagle Outfitters, Toronto Dominion, Jack in the Box, Buckle, Workday, Sumo Logic
8:30 a.m. Jobless claims
8:30 a.m. Real GDP (Q1 second estimate)
10:00 a.m. Pending home sales
1:00 p.m. San Francisco Fed President Mary Daly
8:30 a.m. Advance economic indicators
8:30 a.m. Wholesale Inventories
8:30 a.m. Personal income/spending
8:30 a.m. PCE deflator
10:00 a.m. University of Michigan consumer sentiment