What to Expect in the Markets This Week: Earnings, Inflation, and AI in Focus

The markets have been on a rollercoaster ride in recent weeks, with the S&P 500 index up nearly 7% in five weeks, trading at a forward P/E of nearly 21, well above its 10-year forward P/E of 17.7. However, the rally in rates and the potential for a valuation 'eset' have investors on edge. This week, earnings reports from major tech companies like Nvidia and Apple, along with key economic data and AI-related developments, will shape market sentiment and sector performance.



1. Earnings Reports from Big Tech Companies:
- Nvidia's earnings report for the fourth quarter of 2023 was a key event that impacted the tech sector and overall market sentiment. The company reported revenue of $28.02 billion, plus or minus 2%, for the current quarter, which was roughly $2 billion above analyst expectations of $26.66 billion. This strong performance indicates that the bullish AI infrastructure build-out theme is still intact, as Nvidia's products are widely used in AI and data center applications.
- Apple is expected to unveil new AI-powered features at its annual Worldwide Developers Conference, which could drive investor sentiment and sector performance. The company's focus on AI, along with its strong financial performance, could attract investors seeking exposure to the growing AI sector.
- Other tech companies, such as Oracle, Broadcom, and Adobe, are also expected to report earnings this week. Investors will be looking for indications of demand for artificial intelligence, as well as any updates on new products or services that leverage AI technology. Positive earnings reports from these companies could further boost investor confidence in the tech sector.

2. Inflation Data and Central Bank Policy:
- The latest inflation data, specifically the Consumer Price Index (CPI) report, will significantly influence central bank policy decisions and market expectations. The May 2024 CPI report showed a drop in inflation to 3.4%, giving investors and consumers hope that prices may be starting to cool after a run-up earlier in the year. This cooling trend is crucial for central banks, as it allows them to consider easing monetary policy without exacerbating inflation.
- The Federal Reserve, for instance, has been closely monitoring inflation data to determine the appropriate timing for rate cuts. The drop in inflation to 3.4% in April and the continued cooling trend in May could signal that the Fed may be more inclined to cut interest rates in the near future. This expectation is supported by the Summary of Economic Projections (SEP) released by the Federal Reserve, which shows that some Fed officials have penciled in rate cuts for later this year.
- Market expectations have also been influenced by the latest inflation data. The drop in inflation has led investors to anticipate a more dovish stance from central banks, which could result in lower interest rates and a more accommodative monetary policy. This expectation has been reflected in the bond market, where yields have moved higher since the Fed initiated its first rate cut, challenging the prevailing narrative of a dovish Fed.

3. AI and the Tech Sector:
- The tech sector's focus on AI and data center applications has driven strong performance in recent quarters. Nvidia's earnings report and Apple's upcoming AI-related announcements are expected to further boost investor sentiment in the sector.
- The bullish AI infrastructure build-out theme is still intact, as indicated by Nvidia's strong earnings and guidance. CapEx guidance from mega-cap tech companies, which are customers of Nvidia, also supports this positive outlook for the tech sector.
- However, investors should remain cautious and aware of potential risks and challenges that could impact the market's valuation. The market is currently priced for perfection, which could leave it vulnerable to a valuation 'eset' if any unexpected negative catalyst arises.



In conclusion, this week's earnings reports from major tech companies, along with key economic data and AI-related developments, will shape market sentiment and sector performance. Investors should pay close attention to these events and remain vigilant for potential risks and challenges that could impact the market's valuation. By staying informed and adapting to the ever-changing market landscape, investors can make more informed decisions and capitalize on opportunities as they arise.