Stocks climbed after a US$2 trillion selloff, with investors hanging their hopes on whether big tech will meet the lofty expectations for artificial intelligence during the busiest week of the earnings season. 

About 180 companies in the S&P 500 — representing over 40 per cent of its market capitalization — are due to report this week. Stakes are high for the “Magnificent Seven” megacaps, whose profits are forecast to rise nearly 40 per cent from a year ago, according to Bloomberg Intelligence. The focus on earnings comes after a rout fueled by geopolitical fears and signals the Federal Reserve will be in no rush to cut rates.

“Just beating consensus estimates for earnings won’t be enough,” said Matt Maley at Miller Tabak + Co. “We’re going to have to see much better guidance from Corporate America if the stock market is going to resume its advance.” 

Strategists at Wall Street’s top banks are split on whether companies can deliver on robust forecasts. While Morgan Stanley’s Michael Wilson said he expects profit growth to improve as the economy strengthens, his counterpart at JPMorgan Chase & Co., Mislav Matejka, argues that hot inflation, a stronger dollar and geopolitical tensions are clouding the outlook.

Nearly two-thirds of 409 respondents in Bloomberg’s Markets Live Pulse survey said they expect earnings to give the U.S. equity benchmark a boost. That’s the highest vote of confidence for profits since the poll began asking the question in October 2022.

The S&P 500 topped 5,000 — halting a six-day rout. The Nasdaq 100 rose 1 per cent, with Nvidia Corp. leading gains in big tech. Apple Inc. was named a top pick for 2024 at Bank of America Corp. on optimism over its upcoming results.

Treasuries wavered ahead of a flurry of bond auctions that will test investors’ appetite after yields hit the highest in 2024.

Hedge funds are getting back to buying global equities, shrugging off broader market volatility to gobble up tech stocks at the fastest pace in two months, according to Goldman Sachs Group Inc.’s trading desk.

New long positions outpaced short sales last week while single stocks saw “the largest notional buying in over a year,” the traders wrote in a note — marking a bullish turn in sentiment after hedge funds had been selling for the prior three weeks.

U.S. earnings updates this week will be key to see if they can keep buoying risk appetite in a higher-for-longer rate environment, according to the BlackRock Investment Institute’s weekly commentary.  

“We’re overweight U.S. stocks and see the AI theme broadening,” BII noted.

The challenge to S&P 500 returns this earnings season is that companies will have to produce earnings — and outlooks — that support the already elevated multiples, according to Megan Horneman at Verdence Capital Advisors.

To Marko Kolanovic at JPMorgan, while price action may depend on earnings and could stabilize near-term, the market selloff likely has further to go. 

“We remain concerned about continued complacency in equity valuations, inflation staying too hot, further Fed repricing, and a profit outlook where the implied acceleration this year might end up too optimistic,” he noted.

“Concerns about rising interest rates, stubborn inflation, and geopolitical risks aren’t going anywhere — but this week, the tech sector may be ‘calling the shots’,” said Chris Larkin at E*Trade from Morgan Stanley.

Indeed, the stakes are high for America’s technology behemoths to start delivering on artificial intelligence promises with their earnings poised to decelerate, according to Bank of America Corp. strategists.

Microsoft Corp., Alphabet Inc., Meta Platforms Inc. and Tesla Inc. report results this week — kicking off earnings for the so-called Magnificent Seven. With AI seen as the key to future profits, its contributions to the earnings mix is a the key focus for traders, a BofA team including Ohsung Kwon and Savita Subramanian said.

Big tech companies are running out of steam as the earnings momentum once enjoyed by the sector faces a cool down, according to UBS Group AG’s Jonathan Golub.

He cut the sector recommendation on the “Big Six” technology stocks — Alphabet, Apple, Amazon.com Inc., Meta, Microsoft and Nvidia — to neutral from overweight.

“Earnings momentum is turning decidedly negative following a surge in profit growth,” Golub said.

U.S. stocks are being supported by company fundamentals, but elevated implicit growth expectations and sentiment are now headwinds, according to Citigroup Inc. strategists.

The team led by Scott Chronert says their analysis projects a 76 per cent probability of first-quarter profits exceeding bottom-up consensus. However, the likelihood of earnings upside falls to 49 per cent for the remainder of 2024 — suggesting corporates may be reticent to raise guidance.

This week is consequential for markets, with big tech earnings and Friday’s key inflation data having the potential to redefine the near-term trajectory of the market, according to Jeremy Straub at Coastal Wealth.

“If big tech earnings and Friday’s inflation data disappoint, that could extend the duration and depth of this current stock market correction,” he noted. “While it’s possible the stock market has further room to decline, we remain constructive on stocks for 2024.”

Tempered expectations for Fed interest-rate cuts have rattled U.S. stocks the past few weeks. But history shows there may be nothing to fear: If the past is any guide, equity markets are likely to fare well in an era of higher-for-longer interest rates.

During previous periods of elevated bond yields, the S&P 500 posted an average price return of 13.9 per cent, compared to an average gain of 6.5 per cent during times rates were falling, according to data from BMO Capital Markets going back to 1990.

“We believe stronger-than-expected growth trends in the U.S. recently should be a positive for the economy and corporate profits, at least through the first half of this year,” said Anthony Saglimbene at Ameriprise. “However, the price paid for that firm fundamental backdrop likely leaves inflation elevated and interest rates higher for longer than most expected at the start of the year.”

Corporate Highlights:

• Verizon Communications Inc. reported continued customer losses and lagging revenue.
• Truist Financial Corp. posted lower first-quarter lending profits than analysts expected as it was forced to pay customers more for deposits with interest rates remaining elevated, and the bank trimmed its revenue guidance for the rest of the year.
• Informatica Inc. said it’s not engaged in takeover talks following reports that discussions with Salesforce Inc. had cooled.
• Kroger Co. and Albertsons Cos. agreed to divest more stores to C&S Wholesale Grocers, seeking to make their planned $24.6 billion merger more appealing to antitrust authorities.
• Viking Holdings Ltd. and its existing shareholders are seeking to raise as much as $1.1 billion in a New York initial public offering, with the cruise operator looking to go public as the travel industry rebounds from its pandemic-era slump.
• ASML Holding NV is weighing options to expand its presence in the Netherlands, after the government committed €2.5 billion ($2.7 billion) to infrastructure and education spending in the region where the company’s headquarters are located.
• Tesla Inc.’s weekend move to slash prices across its range in China risks triggering a new round in the nation’s bruising price war, with Li Auto Inc. immediately responding with discounts and cash rebates on new models.
• Reliance Industries Ltd., led by billionaire Mukesh Ambani, posted a lower-than-expected quarterly profit as a continued weakness in its petrochemicals business and higher taxes offset growth in its consumer unit and a large surge in other income.

Key events this week:

• Eurozone S&P Global Manufacturing PMI, S&P Global Services PMI, Tuesday
• U.S. new home sales, Tuesday
• Tesla, PepsiCo earnings, Tuesday
• BOE chief economist Huw Pill speaks, Tuesday
• Germany IFO business climate, Wednesday
• U.S. durable goods, Wednesday
• IBM, Boeing, Meta Platforms earnings, Wednesday
• U.S. GDP, wholesale inventories, initial jobless claims, Thursday
• Microsoft, Alphabet, Airbus earnings, Thursday
• Japan rate decision, Tokyo CPI, inflation and GDP forecasts, Friday
• U.S. personal income and spending, PCE deflator, University of Michigan consumer sentiment, Friday
• Exxon Mobil, Chevron earnings, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.9 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 1 per cent
• The Dow Jones Industrial Average rose 0.7 per cent
• The MSCI World index rose 0.8 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0652
• The British pound fell 0.1 per cent to $1.2352
• The Japanese yen fell 0.1 per cent to 154.83 per dollar

Cryptocurrencies

• Bitcoin rose 3 per cent to $66,580.85
• Ether rose 1.3 per cent to $3,189.85

Bonds

• The yield on 10-year Treasuries was little changed at 4.61 per cent
• Germany’s 10-year yield declined one basis point to 2.49 per cent
• Britain’s 10-year yield declined two basis points to 4.20 per cent

Commodities

• West Texas Intermediate crude fell 0.3 per cent to $82.85 a barrel
• Spot gold fell 2.6 per cent to $2,329.51 an ounce