Stocks continued climbing this morning as yields finally fell. The Dow, S&P, and Nasdaq Composite all gained alongside Treasurys, which ticked barely higher. Earnings optimism kept shares afloat following an extremely volatile stretch of trading in the week prior.
But that all could change this week as Big Tech earnings approach. Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) report Thursday while Microsoft (NASDAQ: MSFT) and Google-parent Alphabet (NASDAQ: GOOG) have earnings due out tomorrow.
Whether stocks rise further in the short-term likely depends on the results of these reports.
“We’re seeing a real separation, of course, between winners and losers, and the market is really starting to reward those positive earnings reports,” said Motley Fool Asset Management president Kelsey Mowrey.
Tech earnings have been a bit of a mixed bag so far. Netflix (NASDAQ: NFLX) surprised to the upside last week and saw its shares soar 14% in response. Snap Inc. (NASDAQ: SNAP), on the other hand, endured its slowest quarterly growth since going public. SNAP shares plummeted 28%.
A bond rally this week would help stocks immensely, too. Treasurys have gone virtually straight down this year, pushing yields ever higher in the process.
Bond volatility, per the Merill Lynch Option Volatility Estimate (MOVE) Index, is also at landmark highs due to a severe lack of liquidity in bond markets. High rates and strict regulations have financial institutions less than eager to act as market makers these days. This has taken a toll on bonds – both government and corporate – in 2022.
That’s led many analysts – myself included – to believe that stocks cannot sustain a rally without help from Treasurys.
Wolfe Research strategist Rob Ginsberg advised clients to be wary of a commodity retracement, too.
“If bonds are the sober adult at the party, and equities are the one taking tequila shots, is it last call for commodities?” he asked.
“After a solid two-year bull run, commodities now sit on crucial support.”
The Invesco DB Commodity Index Tracking Fund (NYSE: DBC), which tracks futures for the world’s top 14 physical commodities, soared almost 200% from its early pandemic lows to its late 2021 highs. The fund is down roughly 20% from those highs but is still outperforming the general market.
Ginsberg thinks it’s about time that commodities play catch up with equities.
And though that certainly seems like a reasonable prediction, commodities could also benefit the most from a Fed pivot – something that investors seem to think is inevitable at this point.
If the Fed waves the white flag on rates, inflation should stampede higher. Stocks will go up in the short-term but precious metals could rise the most, picking up where they left off last year.
Deeply oversold bonds would soar as well.
On the topic of whether the Fed should slow the pace of its rate hikes, Interactive Brokers Chairman and Founder Thomas Peterffy says the Fed needs to stick to its guns.
“I think the Fed has to send the message that we are going to stamp out inflation, no matter what,” he said on Friday.
“And they are in a better position if they can scare the market into easing up on spending rather than having to force them to ease up on it.”
Before anything rate-related happens, though, Big Tech earnings have the spotlight, which should make for yet another volatile week of trading as investors over/underreact.
