The rally of the major U.S. benchmark indices fizzled ahead of reporting season which is in full swing this week. Corporate earnings updates from some of the biggest names are due during the week with Microsoft, Meta, Amazon, Google and Intel reporting. These five stocks have accounted for two-thirds of the S&P 500’s gains this year, so their updates will be scrutinised by investors.

Traders are keenly awaiting data on first quarter GDP due on Thursday, followed by the Personal Consumption Expenditures (PCE) index – the Fed’s preferred measure of inflation, and the employment cost index, both due on Friday. These reports are important and would help refine the final decision of the Federal Reserve in regard to interest rates.

The first reading on the U.S. annual GDP is expected to slow to 2.0% for the March quarter, from 2.6% in the fourth quarter of 2022. While the headline PCE price index is expected to fall, the core reading is forecast to increase by 0.3% month-on-month and 4.5% year-on-year. The employment cost index is also expected to tick higher, consistent with still sticky inflation.

According to the CME’s FedWatch tool there is 90% probability that the Federal Reserve will announce a 25-basis point interest rate hike at its May policy meeting on the 3^rd of May, which is likely to be the last one for this cycle. Rates are likely to be on hold from then on with cuts on the horizon towards the end of the year.

While the containment of the recent banking stress is a big positive, there’s a growing sense that it will leave its mark on the global economy, even if the acute phase of the crisis seems to be over. The risks to the financial system are not as pressing as they were in March but that doesn’t mean the crisis is over.

While earnings results have been solid so far, this reporting season is not shaping to be a great one. According to analysts’ projections profits are expected to drop 6.2% from a year earlier, which would mark the largest decline since the second quarter of 2020. Estimates have come down significantly from last year’s highs and while bottom-line beats significantly outnumber misses, investors’ focus is on forward guidance.

Source: Tradingview

Warnings of recession amid high inflation and high interest rates are widespread and the International Monetary Fund (IMF) has warned of a “perilous combination of vulnerabilities” in markets. The Bank of International Settlements (BIS) warns that central banks are dealing with high inflation coinciding with very high debt levels, which threatens economic stability.

The U.S. is in the midst of a “freight recession” as fewer trucks are delivering goods around the country. The classic recession indicators are flushing a red light too as the Conference Board’s Leading Economic Index (LEI) has dropped for the 12^th consecutive time.

The U.S. benchmark index gained more than 9% from its March low, fuelled by increased liquidity from authorities to relieve the regional banking crisis. As momentum has faded over the past two weeks, investors are questioning if the rally in the lead-up to first quarter earnings season could be sustained, as underwhelming quarterly results reinforce the prospect of deterioration in profit growth.

The rally took a breather around its previous multiple level of resistance at 4,195 showing that the bulls are running out of steam. The leading Relative Strength Index indicator broke below its support on Tuesday showing that momentum has deteriorated, hinting that a potential short-term pull back is on the cards.

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