The stock market is heading into its most exciting, and potentially most volatile, week of the new year as earnings season picks up the pace and the Federal Reserve convenes its first meeting of 2018.
The combination of corporate results and the Fed could make for some lively action in a market that has largely remained tranquil even as it continues to set fresh records and hit new milestones.
There are 125 S&P 500 companies, including 10 Dow components, reporting next week, and they include technology behemoths that tend to generate the most buzz and interest among investors: Facebook Inc. FB, +1.34% Microsoft Corp. MSFT, +1.87% Google parent Alphabet Inc. GOOGL, +0.46% Amazon.com Inc. AMZN, +1.75% and Apple Inc. AAPL, +0.23%
The five together have a market capitalization of $3.6 trillion—on par with Germany’s gross domestic product—and are so dominant and powerful that they not only impact regional economies but influence how we function day to day.
The technology sector as a whole has been among the notable overachievers in a field full of strong performers.
“Growth for the sector remains a standout, with current projections calling for an 18% increase in EPS. Strength is being driven by secular themes within cloud computing, software-as-a-service, and internet companies. Beats are ahead of other cyclical groups due to robust upside from Hardware and Semi [companies],” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities, in a note.
This earnings season is off to a stellar start with 79% of companies beating earnings per share estimates, according to strategists at J.P. Morgan.
Results for most companies are positive with blended earnings-per-share growth “inflecting” higher, said Emmanuel Cau, an equity strategist at J.P. Morgan. Revenue is also healthy with sales up 7% year-over-year and 80% of companies beating estimates, the highest in eight years.
Meanwhile, David Kostin, chief U.S. equity strategist at Goldman Sachs, projected S&P 500 EPS to grow 14% this year, including a 5% boost from tax reforms.
Apart from earnings, the other big tent event next week is the meeting of the Federal Open Market Committee. Economists don’t expect any major policy changes but the central bank will attract its fair share of attention. It is also the last one that Janet Yellen will chair before she hands over the reins to Jerome Powell.
“Overall, we expect only small changes to the January meeting statement. We think the language qualifying data after the third quarter hurricanes will likely disappear. We expect the assessment of current conditions to remain the same, with the Committee continuing to describe job gains and the rate of economic growth as ‘solid’, and the rate of household spending as ‘moderate’,” wrote Paul Mortimer-Lee, chief market economist at BNP Paribas. He also predicted the FOMC to maintain its language on inflation and characterize it as “low.”
Even without the market-moving headlines from earnings and the central bank, the stock market has been a compelling story on its own.
Investors’ confidence in equities has been so steady and upbeat that the S&P 500 has gone over six months without a 0.25% loss, according to Sundial Capital Research’s SentimenTrader.
In an another sign of the stock market’s strength, the S&P 500 has closed at a record 14 times on its way to rallying 7.5% this month—the best since 1955 when the index hit 16 record finishes.
In the week of Jan. 24, $33.2 billion flowed into equity funds, prompting Bank of America Merrill Lynch to refer to the stock market as a “nonstop euphoric cabaret.”
Cheeky comments aside, that bodes well for stocks as many believe that the market’s performance in the first month of the year sets the tone for the remainder in what is known as the January Barometer.
Statistics bear out this theory.
Historically, when the S&P 500 SPX, +1.18% and the Dow Jones Industrial Average DJIA, +0.85% rose 7% or more in January, they ended the full year higher 88% of the time with large caps notching an average gain of 17.5% and blue chips rising an average 10.2%, according to the WSJ Market Data Group. For the Nasdaq COMP, +1.28% which rose more than 8% month to date, its record is just as impressive with the tech-heavy index up 75% of the time for an average advance of 27.4%.
