Stocks closed lower on Thursday, with the S&P 500 and Nasdaq Composite both dropping. Volatility has rebounded from lows but remains low by historical standards. After a slew of earnings reports, futures fell further, and the Personal Consumption Expenditures (PCE) Index report had a muted effect on markets. Interest rate policy forecasts have been uncertain, with expectations of no rate changes until at least September and a 50% chance of a cut or no change. The PCE report showed prices increasing in line with expectations, but did little to clarify the Fed’s next move, with a 50% chance of a rate cut in September and a 60% chance in November.
Earnings have been a focus this week, particularly in retail stocks, with companies like Costco, Dell, Gap Inc., Marvell, and Nordstrom reporting. Costco beat on all metrics but did not announce an increase in membership prices, causing shares to fall. Dell met earnings expectations but provided a disappointing outlook for the second quarter, leading to an 18% drop in shares. Gap Inc. surprised with better-than-expected earnings and raised guidance, resulting in a 20% increase in after-hours trading. Marvell and Nordstrom missed on earnings but maintained forecasts, with shares falling around 5%.
Many companies are currently carrying extended valuations, with the S&P 500 trading at a high multiple of 20.5x its 12-month forward looking earnings. This is above historical averages, requiring earnings growth to justify prices or a potential decrease in prices. Forward guidance, such as Dell’s negative outlook and Gap Inc.’s raised guidance, plays a crucial role in stock performance. Looking ahead, earnings will slow down next week, with only a few larger names like Lululemon scheduled to report. Economic data, including May’s employment report, will be the highlight next Friday.
The S&P 500 is currently sitting on its 21-day moving average, signaling potential bearish sentiment if it breaks below. The PCE report may have alleviated some concern for markets, as some Fed members had hinted at a potential interest rate increase. However, the report gives no reason to change the outlook. Investors are advised to stick with their investing plan and long-term objectives. This content is for educational purposes only and not intended as trading or investment advice.
