February Outlook: First Week Likely to Set Tone as Fed Meeting, Jobs Report, GDP Data Loom Large

Just hours into February, investors will want to tune in for the Federal Open Market Committee’s (FOMC) latest rate decision and comments afterward from Federal Reserve Chairman Jerome Powell. From there, potentially market-moving data only speed up.

February 2 brings a troika of info tech earnings from Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOGL), and Amazon (NASDAQ: AMZN) and closes that Friday with January’s Nonfarm Payrolls report. It’s likely to be a rare one-two-three punch for Wall Street.

Get ready for plenty of volatility.

After such an energetic kick-off, the rest of February has a hard act to follow. However, February 24 marks the one-year anniversary of Russia’s invasion of Ukraine. This continuing conflict is just one of several wild cards that can still swing the markets.

Barring any geopolitical fireworks, it may be a quieter affair as Q4 earnings season starts to wind down and investors settle in to contemplate the usual data with an eye to how the Federal Reserve might interpret it.

Here are other events investors will want to watch:

OPEC: The oil cartel, along with its allies, is expected to meet February 1. It cut daily production goals by 2 million barrels per day in November, but energy market analysts expect OPEC to be cautious in the early going of 2023 as it watches China’s reopening.

China’s reopening: China’s economy ground to a halt the last full week of January for observance of the Lunar New Year holiday. When things get back to normal, keep an eye on “mobility” data from the country because it will show how often people are out and about as the pandemic protocols vanish. If mobility data start improving, that’s a good sign China’s economy can get fired up right away, and it may be supportive for the world crude oil market.

Debt ceiling: Investors may have more than the usual focus on Washington because the federal government recently hit its debt limit, forcing the Treasury Department to take special actions to keep the country paying what it owes. Any major showdown in Congress over this could cause volatility in both stocks and fixed income, though a full-blown battle may not happen until spring.

State of the Union: President Biden’s address, scheduled for February 7, probably won’t be a market-moving event, but it could give investors a better sense of the administration’s spending and tax priorities for 2023.

Big-box earnings: Q4 results from most of the major big-box retailers are due mid-month, which could give investors a better sense of which companies suffered most during the December downturn in retail sales.

Earnings-palooza

At you’re reading this, Q4 earnings are still in their infancy. By February 3, about 60% of S&P 500® companies will have reported. As of the final full week of January, Q4 earnings were expected to fall 4.6%, according to research firm FactSet, and the companies reporting so far haven’t exactly shattered records. A below-normal 67% beat analysts’ estimates for earnings per share (EPS).

We won’t know the final score for earnings season until the game progresses further, but we do know this: Earnings tend to beat analysts’ estimates overall, meaning the latest average analysts’ consensus of –4.6% for overall Q4 earnings is likely to be improved by actual results. That doesn’t mean there aren’t exceptions, and recent data, especially in retail sales, have investors worried that analysts may have to take out the red markers again.

Many wonder whether analysts simply kept their earnings estimates too high. There were widespread expectations last month that Wall Street would significantly trim earnings projections in January, but they haven’t really moved dramatically lower. Meanwhile, December’s worse-than-expected 1.1% monthly decline in U.S. retail sales could signal a holiday shopping season to remember for America’s biggest stores—and not in a good way. We won’t find out for sure until more of the big-box and department stores report the week of February 13, but it looks like holiday season didn’t go well. A sneak preview could come February 2 when AMZN reports how its retail season went, though the focus for AMZN and GOOGL—which also reports that day—is likely to be cloud computing.

To that point, tech isn’t looking like too sunny of a market either. Microsoft (NASDAQ: MSFT) recently announced a layoff of 10,000 employees, and in its press release cited “caution” from “organizations.” That’s likely a reference to corporate customers who use its suite of software and cloud products, and it’s not a surprise to hear about the layoffs considering other tech firms, including GOOGL and AMZN, have already done so.

A slowing global economy has businesses trimming costs, and cloud and semiconductor results could be major evidence of that. Speaking of semiconductors, February brings expected earnings from Nvidia NVDA, a chip company that’s very active in consumer-oriented products like video games.

As AAPL earnings approach, watch for possible updates from AAPL suppliers, which can sometimes give a sense of how demand shaped up for iPhones during the quarter. Back in mid-January, JPMorgan Chase JPM forecast tough sledding for the iPhone maker, noting that product-cycle tailwinds are “beginning to fade” for the iPhone and Apple Watch in particular. Supply chain problems could also feed into lower demand for some of AAPL’s products.

Shares of the biggest mega-caps including AAPL, Tesla TSLA, GOOGL, AMZN, and MSFT all recently hit or came close to 52-week lows before rebounding a bit so far in January. This puts pressure on the companies as they outline expectations for 2023 after disappointing investors in 2022.

Another hike on the way

Back to the Fed.

Markets plunged in late January as worries grew about the Fed possibly hiking the economy into a recession. Fed officials remained hawkish in their recent remarks despite sagging data. Chances are now nearly 100% of the Fed raising rates another 25 basis points on February 1, according to the CME FedWatch Tool. Following the 50-point hike in December, a quarter-point hike would bring the fed funds rate to a range between 4.5% and 4.75%, a new 16-year high.

February’s Fed decision looks pretty much like a done deal. The real question that investors will likely spend much of February contemplating is the Fed’s future path on rates as it approaches its projected “terminal,” or peak, range between 5% and 5.25%. The following FOMC meeting won’t be until March 21 – 22, but the discussion on what the Fed may do is already underway.  

FedWatch already has 78% odds that the March meeting will bring another 25-basis-point hike. That would put the Fed’s benchmark borrowing rate between 4.75% and 5%. It also places odds at 20% of a March pause—the first time the central bank would leave rates alone in more than a year. Keep your eyes on that pause indicator following February’s first three news-filled days.

If the pause discussion gains steam—and a report over the past weekend in The Wall Street Journal suggests it might, it could provide a tailwind for both the stock and fixed income markets. We’ve already seen 10-year Treasury yields retreat from above 3.8% in late December to below 3.5% in mid-January, likely a big support to equities in their recent rally.

With so much conjecture about the Fed’s path beyond February, data become more important than usual. That’s especially the case with February’s upcoming retail sales, Consumer Price Index (CPI), and various global Purchasing Managers’ Index (PMI) reports ahead. All these updates will be under close scrutiny for how they might affect the Fed’s thinking, and Fed speakers, once they return to the microphone after the January 31 – February 1 FOMC meeting and react to every release.  

QUARTERLY DIVERGENCE: JANUARY’S FADE: This three-month chart shows how the Nasdaq Composite ($COMP—candlesticks) and the S&P 500 index (SPX—purple line) both rallied from their December troughs but began running out of steam a bit in late January ahead of a crush of earnings and the Fed meeting. Data sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Setting the table

When all’s said and done, until we see results from the Fed meeting and the February 3 jobs data, it’s hard to make any predictions about how February might go on Wall Street. The first week will set the tone, and so will the course of earnings between now and then.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.