What do you know this week?

Stocks end the trading week again after setting new records.

Signs of slowing inflation prompted markets to become more optimistic about the possibility of the Federal Reserve cutting interest rates and stocks rose as a result, with all three major averages reaching record levels on Wednesday.

During the week, the Nasdaq Composite (^IXIC) rose more than 2% while the S&P 500 (^GSPC) rose more than 1.5%. The Dow Jones Industrial Average (^DJI) rose more than 1%, closing above 40,000 points for the first time ever on Friday.

Next week, upcoming earnings results from Nvidia (NVDA) are expected to be the main catalyst for the markets. Results from Target (TGT), Palo Alto Networks (PANW), and Lowe’s (LOW) will also be closely watched by investors.

The week is expected to be quieter on the economic front, with activity updates in the manufacturing and services sectors as well as the final consumer confidence reading for May. Minutes from the Federal Reserve’s May meeting are also expected Wednesday afternoon.

Minute by minute

The April CPI reading showed that core prices, which exclude the more volatile costs of food and gas, rose 3.6% from a year ago – the smallest annual rise in three years. This has investors pricing in two full rate cuts this year for the first time since early April.

This move brings the market closer to aligning with the Fed’s expectations of two or three interest rate cuts at some point this year. Brian Belsky, chief investment strategist at BMO Capital Markets, listed investors’ alignment with the Fed on interest rate cuts as a reason to support his call for the S&P 500 to end 2024 at 5,600, up less than 7% from Friday’s close.

For investors, the key question will be whether this bullish narrative is sustainable or whether the market will once again jump in front of the Fed as it did in early 2024 when investors priced in nearly seven rate cuts on the back of positive economic data. The first test will come on Wednesday with the release of minutes from the May Federal Open Market Committee meeting, which will provide a deeper look at the discussion among officials.

“The minutes from the May FOMC meeting should look tighter on the sidelines than Chairman Powell’s press conference,” Michael Gapen, US economist at Bank of America, wrote in a note to clients. “Although Powell noted that the bar on hikes is high and that standing still is the appropriate response to stalling inflation, others on the committee were more concerned about whether policy is doing enough.”

The story continues

The bulls are on the run

Belsky’s year-end target hike was followed by another forecast increase on Friday. Pinky Chadha, chief equity strategist at Deutsche Bank, raised his year-end target for the index to 5,500 points from 5,100 points. Chadha pointed to strong earnings growth and an improving macroeconomic outlook as reasons stocks could continue to rise.

“We see the earnings cycle has a lot of legs,” Chadha said. “Although all the growth may not come this year, we see market confidence in a continued recovery rising by the end of the year, supporting equity multiples.”

Nvidia Big Report

Artificial intelligence leader Nvidia is set to report earnings after the closing bell on Wednesday, capping off reports from America’s tech giants. Once again, expectations have skyrocketed for the chip maker. Analysts expect Nvidia’s profits to grow more than 400% in the previous quarter while revenue increased 242%, according to Bloomberg consensus data.

For the second quarter, analysts expect earnings growth of more than 120% and revenue growth of nearly 100%.

“We see enough room for NVDA to post FQ1E (April) revenues that could reach $26B (Data Center ~$22-23B) and potentially $27-28B in total revenues (Data Center ~25-26B) $) — both are good “enough to keep the stock biased higher, in our view,” UBS analyst Timothy Arcuri wrote in a note to clients reviewing the earnings announcement.

The stock is up more than 86% in 2024 and more than 200% over the past year since Nvidia started the AI ​​hype train with its big earnings report in May 2023. Considering how Nvidia stock will impact other potential AI operations, and more broadly the market as a whole, All eyes will be on whether the company is once again able to live up to the hype.

“if [Nvidia] “Its impressive and remarkable streak of beating estimates, raising guidance, and then beating high guidance could continue in the next quarter, meaning AI trading could go further,” Steve Sosnick, chief strategist at Interactive Brokers, wrote in a research note on Thursday. “And it will continue apace.” However, if there is the slightest sign of weakness, it will suffer much more than that stock alone.”

Expansion of artificial intelligence trade

Nvida’s updates on emerging technology demand come at a critical time for the overall AI story. Increasingly, new companies in sectors are being labeled as AI trading.

Just last week, Dell shares rose about 10% as analysts from Morgan Stanley and Evercore ISI revealed upbeat research on the company’s AI prospects.

AI trading has already expanded beyond household names like Nvidia, Microsoft (MSFT), Alphabet (GOOGL, GOOG), and Meta (META). Energy and utilities are the best-performing sectors in the S&P 500 this year, both adding more than 13%. While strategists have pointed to a catch-up in trading in utilities (XLU), artificial intelligence has also been a driver of enthusiasm. The same can be said about Energy (XLE).

Research by Goldman Sachs’ equity strategy team led by David Kostin shows that mentions of AI rose in the first quarter amid “expanding AI trading.” More than 66% of companies in the energy sector mentioned AI during their earnings calls this quarter, up from 19.1% last quarter.

Whether the AI ​​story has legs “may be one of the most important questions we have to ask,” said Jack Manley, global market strategist at JP Morgan Asset Management.

“Is this AI stuff the real deal or just a blip in the plan?” Manley told Yahoo Finance. “And I mean honestly the jury is still out on whether or not it will fundamentally change the world.”

He added: “If markets wake up and say, ‘Hey, maybe we were a little bit excited about this and maybe we delayed some of these earnings a little bit, and that’s reflected in those valuations.’ That’s where I think you have the potential to go down a little bit of a shaky path.”

Weekly calendar

Monday

Earnings: Palo Alto Networks (PANW), Trip.com (TRIP), Zoom (ZM)

economic news: There is no notable economic news.

Tuesday

Earnings: AutoZone (AZO), Macy’s (M), XPeng (XPEV), Toll Brothers (TOL), Urban Outfitters (URBN)

economic news: Philadelphia Fed Non-Manufacturing Activity, May (previously -12.4)

Wednesday

Profits: Nvidia (NVDA), elf Beauty (ELF), Petco (WOOF), Snowflake (SNOW), Target (TGT), TJX (TJX), Williams-Sonoma (WSM),

economic news: Mortgage MBA Applications, May 17 (previously +0.5%); Existing Home Sales MoM, April (0% expected, -4.3% previously); Minutes of the Federal Open Market Committee meeting

Thursday

Earnings: BJ’s (BJ), Deckers Brands (DECK), Intuit (INTU), Polestar (PSNY), Ralph Lauren (RL), Ross Stores (ROST), TD Bank (TD), Workday (WDAY)

economic news: Chicago Fed Activity Index, April (previously 0.15); Initial jobless claims, week ending May 18 (previously 222,000); S&P Global US Manufacturing PMI, preliminary May (formerly 50); US S&P Global Services PMI, preliminary May (previously 51.3); US S&P Global Composite PMI, preliminary May (previously 51.3); Existing Home Sales MoM, January (5.0% expected, -1% previously)

Friday

Profits: Lamar (LAMR), Warner Bros. Discovery (WBD)

economic news: Durable Goods Orders, April preliminary reading (0% expected, 0.9% previous); University of Michigan Consumer Confidence, May Final (67.6 expected, 67.4 previously)

Josh Schaeffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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