Weekly Market Update & SPY Technical Analysis

Weekly Market Update:

The market downturn intensified last week after tensions heightened in the Middle East and new earnings were released. The situation between Palestine and Israel introduced new threats geopolitically, specifically the involvement of Iran. With the U.S. already funding Ukraine against Russia, economists are uneasy on how this new war will impact the U.S. economy. Unlike Ukraine, the countries involved in the Middle East aren’t major grain or wheat exporters, which means that this war won’t directly impact food prices like we saw after Russia’s invasion. However the Middle East accounts for roughly 30% of global oil production, and tensions in the region have historically driven oil prices higher. A rise in oil prices impacts all other sectors if prices stay heightened over an extended period, which in turn could elevate inflation once again, the worst possible scenario for the U.S. economy. 

The Personal Consumption Expenditure Price Index (PCE) reached a high of 7.12% in 2022. This index is The Federal Reserve’s preferred inflation gauge and has improved significantly from those highs to a reading of 2.45% in February; however analysts are expecting a month over month uptick in inflation as energy prices pick back up. The longer inflation stays elevated and above 2%, the less likely The Fed is to cut interest rates this year. Earlier this month, a member of The Fed floated the idea of not cutting rates at all this year, which was the beginning of the market decline. The entire market rally we’ve seen since October 2023 has been built on the idea of The Fed finally cutting interest rates and allowing the economy and profits to expand at a faster rate, but those hopes are diminishing along with buying confidence. 

Netflix and Taiwan Semiconductor Manufacturing reported quarterly earnings last week and both stocks slipped following their reports. Netflix and TSM both beat earnings estimates, but both companies lowered their guidance. Although these two companies are in different industries, they’re both very influential to the technology sector.  Tech stocks have rallied to exponential multiples, and in order to justify their stock growth, they need to report strong earnings and forward guidance. With Netflix in specific, the company announced that they will no longer report subscriber numbers, which was a red flat to Wall Street and can explain the stock’s sell-off. There comes a time in every growth stock’s life when growth slows and it turns into a value stock with consistent, but flat income, or begins a decline in sales. Investors fear that Netflix’s decision to stop subscriber reporting could mean that it is heading into that phase and could mean other companies that rose along Netflix will be doing the same too. Apple and Tesla are other comparable companies that have seen their sales plateau or decline in the last 24 months, and their stocks have suffered because of it. Taiwan Semiconductor’s earnings also beat estimates, but their forward guidance was disappointing to the semiconductor industry as a whole. Semiconductor companies are especially trading at high multiples compared to their earnings, but many analysts justified this because of “expected future growth” due to demand for artificial intelligence chips. TSM, along with ASML, a semiconductor equipment developer, were the first two semiconductor companies to report earnings and their numbers impacted the industry as a whole. Nvidia posted a 10% decline on Friday and SMCI plunged 20%. Now investors will be awaiting more earnings from the industry to gauge how these stocks can perform in the next quarter. 

More key earnings are expected this week from giants such as Meta, Microsoft, Google, and Tesla. Some of these companies are trading at or near their all time highs, so they’ll need to report strong numbers and guidance to justify their market position. Tech stocks hold the most weight in the market, so a good earnings reaction to their reports can turn markets around and push them higher, perhaps saving them from falling further towards a likelihood of a correction. 

SPY Technical Analysis:

Selling volume was notably strong on Friday as SPY headed lower below its 50 day moving average and towards its next available support at the 100 day MA. Buyers did not show any strength last week and are unlikely to do so without a positive catalyst that can alleviate markets. If SPY continues lower, the next available support is 490.70. A break below that level can send SPY sharply lower to 482.70. To the bullish side, buyers need a move at least above 500.50 to regain any confidence.