Wall Street: Megatach and AI to the rescue ahead of FOMC meeting

AI's earnings impact: what to Expect from Amazon, Apple, and AMD

Last week, the US equity markets rebounded following robust earnings reports from Megatech companies, including Google parent Alphabet and Microsoft. These reports confirmed that the impact of artificial intelligence on revenues is not mere hype but a tangible reality.

This week, we await further evidence of AI's impact in the earnings reports of fellow Megatech giants Amazon, Apple, and chip maker AMD. Additionally, companies including PayPal, Coca-Cola, Pfizer, Coinbase, and Qualcomm are scheduled to report. As we reach the halfway point of this earnings season, it's worth noting that approximately 80% of companies have surpassed expectations, against a norm of 76%. Earnings growth is projected to end up around 8% YoY for the quarter.

In the lead-up to this Thursday's FOMC meeting, on Friday night, the Fed's preferred measure of inflation, the Core PCE price index, rose by 0.3% to 2.8% YoY from a year earlier, matching the previous month. This took the 3-month annualised rate to 4.4%, up from 3.7% in February.

What is expected from the FOMC meeting

Date: 2 May at 4am AEST

In March, the FOMC kept the Fed Funds rate unchanged at 5.25%-5.50% for a fifth consecutive meeting. The accompanying statement was nearly identical to the January statement, reiterating that the Fed did not expect to cut interest rates "until it has gained greater confidence that inflation is moving sustainably toward 2%." The Fed's "Dot Plot" showed the median official was still expecting three 25 basis point rate cuts in 2024.

After the March FOMC meeting, the release of a third consecutive firmer-than-expected inflation report is expected to see the Fed keep rates on hold at 5.25%-5.50% in April and adopt a more hawkish tone in the press conference.

The Fed Chair will likely note the lack of progress on inflation and that the Fed will wait "longer than expected" to cut rates. The message of patience will likely be accompanied by an announcement that balance sheet tapering (QT) will begin in June by reducing the maximum monthly redemption cap on maturing securities from $60 billion to $30 billion.

The rates market is already pricing in a more hawkish outcome for the upcoming FOMC meeting, with the first rate cut pushed back until December after the November US election.

Fed funds rate chart

Source: fred.stlouisfed.org.

S&P 500 technical analysis

In the lead-up to the mid-April sell-off, we noted that if the S&P 500 were to see a sustained break of support, it would likely trigger a deeper decline towards 4800. The pullback, however, fell short of the 4800 target, and we need to attempt to answer whether the correction is complete at the 4953 low or whether it is ongoing. To answer this, we turn to our Elliott Wave analysis.

Last week's rally in the S&P 500 cash is viewed as a second wave (Wave B) of a three-wave (ABC) corrective sequence, unfolding from the 5264 March high. This means that once the current rally is complete, we expect another leg lower (Wave C) towards the 4850/4750 area, where we will look closely for signs of basing to establish longs. Ideally, for this scenario to play out, the current rally (Wave B) should spend little time above resistance (formerly support) at 5150/5200. However, with such a full calendar ahead, some overshoot is possible.

S&P 500 daily chart

Source: TradingView

Nasdaq technical analysis

In the lead-up to the mid-April sell-off, we highlighted the flattening out of the Nasdaq's uptrend and noted that if it were to see a sustained break of support at the 17,750ish level, it would likely see a deeper decline towards 17,000, which played out well. The question we need to deal with now is whether the Nasdaq correction is completed at the 16,973 low or whether it is ongoing. To answer this, we again turn to our Elliott Wave analysis.

Last week's rally in the Nasdaq cash is viewed as a second wave (Wave B) of a three-wave (ABC) corrective sequence, unfolding from the 18,464 March high. This means that once the current rally is complete, we expect another leg lower (Wave C) towards the 16,500/300 area, where we will look closely for signs of basing to establish longs. Ideally, for this scenario to play out, the current rally (Wave B) should spend little time above resistance (formerly support) at 17,750/800. However, with such a full calendar ahead, some overshoot is possible.

Nasdaq daily chart