Image Source: Pixabay

Earnings and economic data will dominate the landscape this week. The names on the earnings calendar will start Tuesday with Tesla, followed by Meta on Wednesday, and Microsoft and Alphabet on Thursday. Also, on Thursday, we will get the GDP report for the first quarter, which is expected to show growth of 2.5%.

PCE, which is released on Friday, is expected to rise by 0.3% month-over-month and 2.6% year-over-year. Core PCE is expected to jump by 0.3% month-over-month and 2.7% year-over-year.

Overall, this week’s data and earnings will have a big say in where markets go over the next several weeks. If the PCE data comes as expected, it likely means that Fed rate cuts would not happen until the very end of the year. Meanwhile, hot PCE data would probably kill any hope for rate cuts in 2024.

Earnings

The odd thing is that earnings estimates for the first quarter have dropped over the past 30 days by around $1.62 per share, yet overall earnings estimates for 2024 have fallen just $0.03 per share because analysts have increased estimates for the second, third, and fourth quarters by $0.27, $0.44, and $0.56 per share, respectively.

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This has been the trend for some time, where analysts remove growth from the present and shift to the future, which is basically what happened in 2023, leading to “growth” in 2024. But that will also mean that the big companies reporting results this week will need to give guidance to support the rise in earnings estimates we are seeing in future quarters.

What drives these estimates changes is the same game we see every quarter: margins contracting for the current quarter, but holding firm or rising for future quarters. That was the game in 2022 and 2023, but in the end, margins collapsed, and that is likely what will happen as we go through 2024. I don’t see how margins will go from being in the 10% range in the past two years to almost 12% in 2024.

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Revenue growth in 2024 is expected to be just 1.5% when measuring from where estimates stood for 2023. The only way you can get earnings growth in 2024, roughly 10%, is to have lots of buybacks or margin expansion. So if margin expansion falls through, we will need lots of share buybacks, or companies will need to boost sales through higher prices.

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Data

Returning to this week’s GDP and PCE, expectations are relatively modest, with the risk of some upside to these numbers based on the GDPNow forecast and some anecdotal inflation data. The point is that rates look positioned to go higher from here, especially after the 2-year consolidation at around 5% over the past week following the hot CPI data.

At this point, the 2-year looks poised to travel to around 5.25%, potentially going higher than that purely based on the technicals. I would guess that the fundamentals would come into place to support the technical view. 

Rates

There are two bullish patterns in the 2-year. The first and most apparent is the giant cup-and-handle pattern, which suggests a two-year climb to 5.38%. Secondly, there is a small bull flag, which suggests a move to 5.23%.

However, a 1.618% extension of the bull flag would get the flag and the cup-and-handle pattern to both meet at 5.38%, which would be freaky, given the low probability that the pattern would present similar potential destinations.

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Hikes

It would take the market to start pricing in rate hikes again from the Fed to get there on the 2-year. While that seems like a probable non-event, given the data we have seen, it wouldn’t surprise anyone to hear me say that I think the policy is not as restrictive as the Fed thinks, as I have repeatedly said for months.

“Powell Indicator”

The “Powell” Indicator, which measures the spread between the 3-month Treasury bill rate and the 3-month Treasury bill 18-month forward contract rate, now stands at just -59 bps. That is not because the 3-month Treasury bill rate is falling but because the 18-month forward contract rate is rising. If this spread continues to narrow, with the forward rate rising to the spot rate, it would probably be the best signal of where the market thinks the Fed’s overnight rate is going.

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Dollar

This would be bullish for the dollar index, and it would need to get beyond the 107 resistance to become very bullish. At that point, the dollar would have a near uninterrupted path back to the 113 level.

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S&P 500 (SPX)

The S&P 500 is nearing oversold levels, but it is not quite oversold yet, and it would need to see the RSI fall below 30 and the price to drop below the lower Bollinger band. For now, the RSI is at 31, and even with the price below the lower Bollinger band, it is getting close to those oversold conditions. It wouldn’t be surprising to see the S&P 500 bounce, but I think any bounce is likely to be short-lived. Ultimately, I still believe there is a path back to 4,100.  

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Nvidia (NVDA)

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Nvidia finally broke on Friday, and we are now in the process of filling the gap from Feb. 21. At $670, a gap fill still seems like the most likely outcome, with resistance at $800 now firmly in place and support at $750. However, below $750, things to the downside are likely to continue, based on the gamma profile.

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Meta (META)

Meta fell out of its ascending megaphone pattern on Friday, which is a bearish indication.

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For Meta, it’s all about the $470 level, which has a significant amount of put gamma and a technical gap. At that level, one would expect to see a bounce. A break of the $470 mark would open the possibility of a stepper drop to $390 and a gap fill from Meta’s fourth-quarter results.

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Anyway, that is all for today. Enjoy the rest of your Sunday.

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