- S&P 500 lost 1.16% on Tuesday.
- Banking weakness survives First Republic takeover.
- Fed’s interest rate decision expected at 25 basis points late on Wednesday.
- Some earnings outlook weakness has been seen this week.
The S&P 500 looks to be finally turning over after its 10% rally from its March 13 low. Tuesday’s 1.16% pullback furnished a perfect evening star candlestick pattern that spells trouble for the index. An unexpected sell-off in regional banks on Tuesday proved that JPMorgan’s (JPM) buyout of First Republic Bank (FRC) has not put an end to March’s banking turmoil. And to make matters even more worrisome this week, Federal Reserve Chair Jerome Powell is slated to deliver his interest rate decision on Wednesday afternoon. The market expects 25 basis points, but many onlookers are worried that an interest rate hike could make the banking situation much worse.
At the time of writing, NASDAQ 100 futures and S&P 500 (SPX) futures are slightly ahead in Wednesday’s premarket, up 0.15% and 0.11%, respectively.
S&P 500 news: Banks back in bear mode as Fed awaits
PacWest (PACW) and Western Alliance (WAL), two regional banks that saw their stocks plunge alongside First Republic back in early March, again lost more than 27% and 15%, respectively on Tuesday. There was no clear reason for the sell-off, but pundits blamed it on everything from the fact that recent bank collapses were pushing up deposit insurance payments for regional lenders to exposure to souring commercial real estate loans and the Fed’s expected hike. PACW stock has rebounded more than 5% in Wednesday’s premarket.
The Fed’s interest rate decision could be part of the problem as first quarter earnings from a number of regional lenders showed that deposits are seeping out of many of these banks in search of higher interest rate products like money market funds. Most banks used their deposits during the last decade to purchase low-interest securities or make loans at these lower rates. Now that the Fed has hiked interest rates at one of its fastest paces in the central bank’s history, these banks cannot afford to raise their interest payments on customer deposits, because their portfolios are paying much lower rates. The thinking goes that the Fed’s failure to consider the banking sector’s profile and continue raising rates to reduce inflation could exacerbate this problem. Higher rates may push far more depositors to move their deposits, which could produce a slew of new banks ailing in the same way as First Republic.
Earnings mostly beat, but outlooks, price cuts expect a recession
Advanced Micro Devices (AMD) and Ford (F) stock both caved after earnings on Tuesday as both management teams offered up conservative outlooks in the upcoming quarters. Ford stuck to its full-year outlook but cut the price of its electric Mach-E by between $4,000 and $1,000, depending on the model. This gave analysts the idea that Ford would likely lose more than the $722 million its electric division lost in the first quarter as the automaker switches from internal combustion engine vehicles to a wider array of electric offerings. Tesla (TSLA) price cuts in the first quarter appear to be causing an industry wide price war that should reduce profits over the next several quarters at least.
AMD, for its part, also beat Wall Street earnings expectations for the most recent quarter (ending in April), but the semiconductor designer is expecting sales of $5.3 billion in the second quarter. This is $100 million below the most recent quarter and about $210 million below Wall Steet forecasts. Additionally, CEO Lisa Su said gross margin would contract to 50%, about 40 basis points below consensus.
Earnings of the week
May 3 – Qualcomm (QCOM), CVS Health (CVS), Kraft Heinz (KHC) and MetLife (MET)
May 4 – Apple (AAPL), Anheuser-Busch InBev (BUD), Booking Holdings (BKNG), Shopify (SHOP), DraftKings (DKNG) and Fortinet (FTNT)
May 5 – Enbridge (ENB), Cigna Group (CI), and CBOE Global Markets (CBOE), FuboTV (FUBO) and AMC Entertainment (AMC).
S&P 500 quote
Anna Han, Wells Fargo equity analyst, discussed her firm’s call on the S&P 500 correcting 10% in the near future on the Bloomberg Surveillance podcast:
“We’re seeing margin compression. We think that earnings are slowing, and right now where earnings projections are as we go through Q1 reporting, they continue to believe in flat growth YoY for the S&P 500. We think that is too optimistic, so we’re bringing our EPS number down about 10%.”
S&P 500 technical analysis: Dreaded evening star arrives
A textbook evening star formation has been realized between Friday, Monday and Tuesday sessions, which is highlighted in the red circle on the daily chart. First comes Friday’s strong green candle. This is followed by Monday’s indecisive evening star that saw the close well below the session’s high and near the open. Then Tuesday finished the pattern with a large red candle. This pattern spells a bearish reversal, and it it not coincidental that Tuesday briefly saw the S&P 500 drop below the 4,100 level. It seems it wants to move closer to last week’s pullback rather than attempt a break above 4,200 – something that has not happened since August 2022.
Expect the S&P 500 to move below the 1-day moving average this week and then descend toward 3,800. That is the level where support was found during March, as well as last December. The 9-day moving average is nearly ready to drop below its 21-day counterpart, and the Moving Average Convergence Divergence (MACD) indicator also confirms this coming downtrend.
S&P 500 daily chart
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