After a volatile four-week stretch where trading on Wall Street was heavily driven by the prospect of new trade policies and a user-data scandal at Facebook Inc. FB, +4.42% which drove the overall technology sector sharply lower, investors are eager to return to the operating on the basis of hard economic data and corporate fundamentals.
The coming week not only brings with it the start of April—historically, the best month of the year for the Dow Jones Industrial Average DJIA, +1.07% —but also highly anticipated economic data and the expectation that U.S. corporations will begin to preannounce quarterly results for the first quarter. Such factors, by providing concrete data points, could help tamp down some of the recent volatility in stocks, which has been marked by violent swings as investors grapple with ramped-up anxieties around protectionism and drama emanating from the White House, which has been part of the recipe for choppier markets
On Thursday, with markets closed in observance of Good Friday the following day, the Dow Jones Industrial Average rose 309 points, or 1.2%, to 24,143. The S&P 500 SPX, +1.38% gained 37 points to 2,642, a return of 1.4%. The Nasdaq Composite Index COMP, +1.64% surged 114 points, or 1.6%, to 7,063.
For the week, the Dow rose 2.7%, while the S&P added 2.1% and the Nasdaq advanced by 1%.
However, all three saw steep declines on the month, with the Dow off 3.5%, the S&P 500 off 2.7% and the Nasdaq sinking by 2.9% in its biggest monthly drop since January 2016.
In the first quarter, the blue-chip gauge fell 2.3% and the S&P lost 1.2%. Both ended nine-quarter streaks of gains; for the Dow, that represented its longest such streak since 1997.
Read: The simple reason the Dow snapped a 9-quarter win streak: Wall Street’s surging ‘fear index’
“We’ve been in a period where investors want to focus on something, but since we didn’t have earnings or important data, many focused instead on Washington, D.C. and the news of the day, which move stocks more than they should when you’re lacking fundamental drivers,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. “I seldom look forward to earnings or data because of how busy things get, but I am now. What the market has been focusing on lately has been frustrating.”
What’s ahead for the week?
The March payroll report, scheduled to be released next Friday, will provide clarity not just into the state of the U.S. labor market, but also the level of wage growth, a recent flashpoint for investors cautious about the level of inflation in the economy, and whether the Federal Reserve might become more aggressive in raising interest rates to combat any inflationary spike. Meanwhile, any preannouncements or earnings will give a clear look at the state of American corporations at a time when valuations are seen as stretched and there are myriad uncertainties—including trade policy and central bank actions—whose impact has been hard to calculate.
The mean estimate of analysts polled by MarketWatch is for 200,000 jobs to have been added in March, down from the 313,000 in February. Average hourly earnings are seen growing 0.2%, far from the 2.9% growth seen in January, which sparked concerns that the Fed could speed up its pace of interest-rate hikes to combat any signs of runaway inflation.
“There’s no question wage growth is the key number of next week,” said BNY Mellon’s Grohowski. “Normally the jobs number itself is the bigger focus, but I for one will be thumbing right past that to go right to wages.”
The corporate earnings outlook
Despite the turbulence in March, there are signs that bulls should be optimistic.
According to FactSet, earnings for companies in the S&P 500 are expected to grow 17.3% in the first quarter. Not only would that represent the fastest pace of profit growth since the first quarter of 2011, but expectations have been swiftly ratcheted up over the past few months. At the end of December, analysts were expecting a growth rate of 11.4%. Much of that increase was due to the recently passed tax-reform bill.
That increase in analyst forecasts occurred against a backdrop of falling share prices. While rising expectations will make it harder for companies to blow past forecasts, the recent declines suggest the strong profit picture may not have been fully priced into shares. The forward 12-month price-to-earnings ratio for the S&P currently stands at 16.1, in line with the index’s five-year average, but above the 10-year average of 14.3.
Goldman Sachs expects the S&P 500’s return on equity to rise to 17.6% in 2018 from 16.3% last year. “The reduction in the corporate tax rate alone will boost ROE by roughly 70 basis points, outweighing margin pressures from rising labor, commodity, and borrow costs,” it wrote in a note to clients published earlier this week. The investment bank has a price target of 2,850 for the S&P, which would represent upside of nearly 8% from current levels—a gain that would roughly return the benchmark index to record levels.
According to the AAII Investor Sentiment Survey, 35.3% of investors describe themselves as bearish, meaning they expect prices will be lower in six months. The amount of pessimism has jumped by 14 percentage points over the past two weeks—a period that followed a two-week drop in the major indexes—and is currently at its highest level since September. The ratio of bulls fell to 31.9% in the latest week, and has been under its long-term average of 38.5% in six of the past eight weeks.
“There’s no question that volatility is becoming ever more normal,” said JJ Kinahan, chief market strategist at TD Ameritrade, referring to the recent swings in the market. However, he noted that these types of gyrations were normal for the market, whereas the quiet trading seen throughout all of 2017 was the historical anomaly.
“Things have recently been driven by day-to-day stock news like Facebook and Amazon, but it feels more dramatic because these are the stocks that have been recently driving the market.” Kinahan suggested that may change with the release of the payroll report on Friday. “It should show investors that the economy continues to do well, despite the noise, and it shouldn’t change anyone’s views about the Fed unless it’s crazy one way or the other.”
What else is on deck next week?
Monday
- Readings on manufacturing, with Markit manufacturing for March due at 9:45 a.m. Eastern
- ISM’s more closely watched manufacturing reading is due at 10 a.m.
- Construction spending at 10 a.m.
Tuesday
- Motor vehicle sales throughout the day
Wednesday
- The ADP private-sector jobs report is due at 8:15 a.m.
- Markit services PMI for March at 9:45 a.m.
- ISM services for March at 10 a.m. are due, with forecast for 59, from 59.5 the previous month
- Factory orders for February will be released, a gain of 1.7% is estimated
Thursday
- Weekly jobless claims come out at 8:30 a.m.
- Trade deficit also are set to be released at 8:30 a.m.
Friday
- Nonfarm payrolls-report are due at 8:30 a.m.
Spotifiy IPO
Music-streaming service Spotify Technology SA SPOT, +0.00% will kick off its public debut on April 3, via a direct listing on the New York Stock Exchange.
Read: Spotify IPO: 5 things to know about the streaming-music giant’s direct listing