Dow Jones, Nasdaq, S&P 500 weekly preview: Why analysts expect stocks to rotate lower

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By Senad Karaahmetovic

U.S. futures are moving lower in premarket Monday as investors brace for another busy week. The Federal Reserve meeting is the key event and the biggest catalyst for stocks this week, in addition to the continuation of the earnings season.

S&P 500 gained 2.5% last week to finally close above the descending trend line that connects previous lower highs. However, the rally stopped at another important resistance - 4100 - which is likely to cap any near-term gains, until at least the Fed takes the central stage on Wednesday.

Nasdaq Composite Index (IXIC) closed over 4.3% higher last week on the back of positive earnings reports from mega-cap stocks, like Tesla (NASDAQ:TSLA) and Microsoft (NASDAQ:MSFT). Last week’s high of 11691.89 is the highest that Nasdaq traded since September last year.

Dow Jones Industrial Average (DJI) was the worst-performing major index last week with gains of just over 1.8%. Still, the index trades just about 8% from its all-time high after staging an 18.5% rally since October.

All focus on FOMC and earnings

While the consensus sees the Fed hiking by 0.25% at this week’s meeting, investors will be closely watching commentary to assess when the central bank intends to stop hiking rates altogether.

The rate increase by 25 basis points would mark the smallest hike since March 2022, when the Fed was forced to act forcefully to combat soaring inflation. Fed officials will be discussing how much more they need to hike and whether there is enough room to pause hikes from here.

“The FOMC’s goal in raising interest rates is to dampen demand and economic activity to support further reductions in inflation. And there is ample evidence that this is exactly what is going on in the business sector. … The goal is not, I would emphasize, to halt economic activity,” said Fed’s Christopher Waller.

In the meantime, the earnings season will continue to play out with some big names set to take the stage this week. On Tuesday, AMD (NASDAQ:AMD), Caterpillar (NYSE:CAT), General Motors (NYSE:GM), McDonald’s (NYSE:MCD), and Pfizer (NYSE:PFE) are some of the big names scheduled to report on their December quarter performance.

Meta Platforms (NASDAQ:META), Alibaba NYSE:BABA), and Peloton (NASDAQ:PTON) will follow on Wednesday, before three mega-cap titans - Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOGL) - report on Thursday after market close.

What are analysts saying about U.S. equities?

Here’s what prominent research firms are saying about U.S. equities ahead of the new trading week.

Morgan Stanley: “While there have been several positive developments, we think the good news is now priced, and reality is likely to return with month-end and the Fed's resolve to tame inflation… Investors seem to have forgotten the cardinal rule of 'Don't Fight the Fed'. Perhaps this week will serve as a reminder.”

Goldman Sachs: “We expect two additional 25bp hikes in March and May, but fewer might be needed if weak business confidence depresses hiring and investment, or more might be needed if the economy reaccelerates as the impact of past policy tightening fades. Fed officials appear to also expect about two more hikes and will likely tone down the reference to “ongoing” hikes being appropriate in the FOMC statement.”

JPMorgan: “Our stance is that in Q1, initially the market will keep moving higher, given good seasonals, light positioning and re-risking drive, with the 3 above outlined positives still dominant, but also that ultimately one should end up fading this upmove.”

Raymond James: “A soft landing is increasingly getting priced in for U.S. equities as cyclical sectors have meaningfully outperformed defensive in January so far as credit spreads have tightened back to pre-war levels. We will get a sense for what Mr. Powell and Fed think of all this optimism this week. In the last 25 years, this is the strongest January rally in equities outside 2019.”

BTIG: “Trends and breadth have improved, and as is often the case, sentiment has followed price in a positive feedback loop. The most well touted improvement has been the SPX's break of its downtrend and 200 DMA (3,957). To be clear those are positives, but we find horizontal resistance is more meaningful as it represents true supply/demand dynamics. 4,100 is that key horizontal level, and while clearing that would be a step in the right direction, we should note that February has averaged -0.26% over the last 25 years.”

Oppenheimer: “We expect strength to continue over the coming months, because 1) our cycle work is a tailwind, 2) internal breadth continues to broaden, and 3) cyclical leadership has supported the turn. The historical average gain coming out of a non-recessionary bear market is our basis for S&P 4,400 by Dec. 2023. We expect the S&P to first overshoot to 4,600 in H1’23.”