U.S. stocks recover after two-day selloff as more Big Tech earnings loom

What’s driving markets

U.S. stocks shrugged off weakness from the past two days early Thursday as investors braced for more Big Tech earnings, while continuing to react to comments from Federal Reserve Chairman Jerome Powell made during Wednesday’s post-Fed meeting press conference.

Both factors are very likely to continue driving sentiment for the rest of the week, along with economic data on the labor market.

Earnings reports released late Tuesday from Microsoft
MSFT,
+2.26%,
Alphabet
GOOG,
+0.98%
and Advanced Micro Devices
AMD,
+0.25%
failed to match the AI-driven optimism that has helped push the market this week to a record high.

Soon, investors will digest earnings from three more of the Big Tech stocks that have driven most of the S&P 500’s advance over the past year. Apple
AAPL,
+0.87%,
Meta
META,
+2.46%
and Amazon.com
AMZN,
+1.91%
will announce their results after Thursday’s close.

If their results fail to live up to Wall Street’s lofty expectations, stocks could see more downside in the immediate future, one analyst warned.

“[M]ost investors have been waiting in ambush for the slightest misstep to take advantage of selling the overstretched tech rally,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Apple, Amazon and Meta’s results “better blow investors’ minds. Otherwise, the tech selloff is poised to gather momentum,” she warned.

In addition to the megacap tech names mentioned above, investors will also receive earnings from Atlassian
TEAM,
+2.81%,
U.S. Steel
X,
-1.60%
and Skechers
SKX,
+1.44%
after the close.

Traders will also be keeping a wary eye on the regional banking sector after shares in New York Community Bancorp
NYCB,
-11.05%
plunged as the lender highlighted difficulties in commercial real estate.

A Japanese bank, Aozora
8304,
-21.49%,
issued a profit warning, as it cut the value of its U.S. office portfolio and nursed losses on U.S. and European bonds.

Meanwhile, investors continue to consider the timetable for when the Fed may begin lowering borrowing costs. Fed Chair Jay Powell said at his post-meeting press conference on Wednesday that a rate cut in March was “not the most likely case or the base case.”

Investors expressed disappointment at this push back, but fixed income futures markets now see an even greater certainty of rates falling at the subsequent Fed meeting in May, and indeed futures traders also still see around 150 basis points of cuts occurring this year.

“It’s very much a case of train delayed, not cancelled, at this point,” said Steve Clayton, head of equity funds at Hargreaves Lansdown. “But investors are likely to be less forgiving if we see any data emerging suggesting that the economy still has scope to keep inflation bubbling away,” he added.

Investors have received a raft of economic data this week about the U.S. labor market. The latest installment, released early Thursday, was the weekly report on initial jobless claims, which was released alongside fourth quarter productivity data.

The jobless claims data showed the number of Americans who applied for unemployment at the end of January rose to a nearly three-month high of 224,000, possibly a sign of some softening in what’s been an incredibly strong labor market.

A quarterly report on productivity showed American workers became even more productive during the fourth quarter, a sign that the U.S. economy may be growing even faster than expected.

Investors also received the the final reading of the S&P manufacturing PMI survey for January, which came in at 50.7, up from 47.9 in December, and higher than previously estimated. It marked the strongest improvement in the sector’s performance since September 2022.

On Friday, investors will receive the Labor Department’s nonfarm payrolls report for January, seen as a marquee piece of economic data.

Companies in focus

• Peloton Interactive Inc.
  PTON,
  -20.67%
  shares fell after the company’s outlook implied more challenges ahead for the one-time pandemic darling.

• Honeywell International Inc.
  HON,
  -3.11%
  shares slumped despite the company reporting earnings in line with Wall Street’s expectations.

• Merck & Co. Inc.
  MRK,
  +2.18%
   saw it shares climb after reporting strong earnings, powered by growth in its cancer and vaccine products.