The stock market rally is countered by earnings and employment data from the Fed and the tech industry in the crucial week

Stock market investors could take note of a number of key events in the coming week, including the Federal Reserve's policy meeting, a closely watched December jobs report and a surge in earnings from mega-cap technology companies, all of which promise insights into the state of the economy and the interest rate outlook.

The benchmark S&P 500 SPX index closed at a record high for five straight trading days on Thursday, the longest such streak since November 2021. The index closed slightly lower on Friday, but posted weekly gains of 1.1%, while the Nasdaq Composite COMP According to Dow Jones Market Data, the value rose 1% and the blue-chip index Dow Jones Industrial Average (DJIA) gained 0.7% this week.

“What we are seeing is that as of 2023, market participants are still playing catch-up and putting money aside to take advantage of it,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management.

“Wall Street is still trying to lock in profits as quickly as possible, so it is very short-term oriented until there are big market-moving events,” he said, adding that one of the events could well be “disappointing” Fed speech .”

Fed Chairman Powell has good reasons to push back interest rate cuts

Expectations that the Fed would begin easing monetary policy as early as March after the fastest tightening cycle in four decades has helped fuel a rally in U.S. stock and bond markets. According to the CME FedWatch tool, investors are currently largely expecting interest rate cuts of five or six quarter points by December, which will bring the key rate down to around 4% to 4.25% from the current range of 5.25% to 5.5%.

See: Economic growth underpinned by fourth-quarter GDP reinforces the Fed's cautious approach to rate cuts

While no rate change is expected at the central bank's first policy meeting this year, some market analysts say Fed Chair Jerome Powell's comments during his news conference on Wednesday are likely to shift market expectations and push back forecasts of a rate cut in March become .

Thierry Wizman, global foreign exchange and rates strategist at Macquarie, said a stock market rally, “too dovish” signals from the Fed's December meeting, a still-robust labor market and escalating conflicts in the Middle East could suggest Powell needs to hold on to the currency “[monetary] Streamlining Bias” next week.

The stock market rally could “conceivably backfire” due to easing financial conditions, while the labor market has not weakened to the extent Fed officials had hoped, Wizman said in a telephone interview with MarketWatch on Friday.

Fears that inflation could rise again amid conflict in the Middle East and the Red Sea further complicate the situation and could reinforce the Fed's cautious approach to rate cuts, he said.

See: Oil traders aren't panicking about attacks on ships in the Middle East. Here's why.

Meanwhile, a move to “neutral bias” does not automatically mean the Fed will cut interest rates soon, as the Fed still needs to move to “accommodative bias” before it can actually cut rates, Wizman said. “I think the market is becoming too cautious and not recognizing that the Fed has very, very good reasons to push this forward [the first rate cut] out by June.”

Markets are “laser focused” on January’s jobs report

The jobs data could also influence U.S. financial markets next week and serve as a “big swing factor” for the economy, said Patrick Ryan, head of multi-asset solutions at Madison Investments.

Investors have been looking for clear signs of a slowdown in the labor market that could prompt the central bank to start cutting interest rates as early as March. That bet could be tested as early as Friday with the release of nonfarm payrolls data for January.

Economists polled by The Wall Street Journal estimate that U.S. employers added 180,000 jobs in January, compared with a surprisingly strong 216,000 in the final month of 2023. The unemployment rate is expected to rise to 3.8% from 3.7% in the previous month almost half a century deep. Wage growth is forecast to moderate slightly to 0.3% in January after a solid 0.4% gain in December.

“This will bring everyone to the point,” Ryan told MarketWatch by phone Thursday. “Anything that shows you real weakness in the labor market is going to call into question whether the stock market is ready to trade at more than 20 times earnings this year.” According to FactSet data, the S&P 500 is trading at a lower rate on Friday afternoon Trading at 20.2 times earnings.

Six of the “Magnificent 7” could continue to drive S&P 500 earnings higher

The week ahead is also packed with gains from some big tech companies that have fueled the stock market rally since last year.

Five of the so-called “Magnificent 7” tech companies will report earnings starting next Tuesday when Alphabet Inc.

GOOG

and Microsoft Corp.

MSFT

take center stage, followed by Apple Inc.'s results.

AAPL

,
Amazon.com

AMZN

and metaplatforms

META

on Thursday.

Of the remaining two members of the “Magnificent 7,” Tesla Inc.

TSLA

reported “massively disappointing” results for Wall Street earlier this week, while Nvidia Corp

NVDA

The results will be published at the end of February.

See: Here's why Nvidia, Microsoft and other 'Magnificent Seven' stocks will be back on top in 2024

Stock prices of some of the companies in the “Magnificent 7” have hit record highs in recent weeks, which could help boost the value of the S&P 500, said John Butters, senior earnings analyst at FactSet Research. He also said these stocks are expected to boost the benchmark index's gains in the fourth quarter of 2023.

In a diagram: Tech leads the stock market's January rally by a wide margin. Watch out for February.

Overall, Nvidia, Alphabet, Amazon.com, Apple, Meta Platforms and Microsoft are expected to report 53.7% year-over-year profit growth for the fourth quarter of last year, while excluding these six companies there is a mixed profit decline for the remaining 494 companies in the S&P 500 were 10.5%, Butters wrote in a note to clients Friday.

“Overall, the blended earnings decline for the entire S&P 500 is 1.4% in the fourth quarter of 2023,” he said.

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