Stocks were muted on Monday morning as investors digested the largest bank failure since 2008 ahead of what is already expected to be a jam-packed week.
A Federal Reserve policy decision, Apple (AAPL) earnings, and the April jobs report await investors in what Fundstrat's Tom Lee sees as a decisive week for the "most hated" seven-month rally since stocks bottomed in October.
“We think this coming week could represent the make or break moment for our view and for those bearish/cautious on markets,” Lee wrote in a note to clients on Sunday.
The S&P 500 entered the week up nearly 20% since its October lows and nearly 8.5% higher since the start of 2023. Year-to-date, the Nasdaq is up nearly 17% while the Dow Jones Industrial Average has gained less than 3%.
Given the rally, Lee believes much of the potential good news is already priced in. One measure he is looking at is manufacturing activity.
The Institute for Supply Management's manufacturing PMI came in at 47.1 in April, above the previous month's reading of 46.3 and better than estimates of 46.8, according to Bloomberg consensus data. A reading below 50 indicates that the manufacturing sector is generally contracting.
The ISM's PMI report, which is seen as a forward-looking indicator of economic activity, has been on a downward trend since March 2021. Lee argues a bottoming should benefit Industrials (XLI), which have gained 1.7% this year, lagging the S&P 500 year-to-date by about 7 percentage points.
S&P Global's US manufacturing PMI, which was also published Monday morning, signaled expansion for the first time in six months.
Investors will now shift their focus to corporate earnings, with AMD (AMD), Starbucks (SBUX), Ford (F), Pfizer (PFE), and Uber (UBER) set to report on Tuesday ahead of Wednesday’s Fed announcement.
The Fed will announce its latest policy decision at 2 p.m. ET, with Fed Chair Jay Powell set to hold a press conference a half-hour later. According to data from the CME Group, markets are placing an 87% chance on the Fed raising rates by 0.25% on Wednesday.
A 0.25% hike in interest rates would push the Fed’s benchmark rate to a range of 5%-5.25%. The benchmark rate hasn’t breached 5% since July 2007. With no new economic projections set for release, Powell's comments will be in focus for investors.
Lee notes that the Fed signaling no rate hike in June would be "thesis changing." Markets are currently pricing in a less than 25% chance for an interest rate hike in June, according to CME Group.
"Our expectation is that the Committee will effectively signal a pause, but with a bias to tighten," JPMorgan economists wrote in a note to clients on Friday.
JPMorgan points out Powell's exact phrasing during Wednesday's press conference will be crucial and is closely watching for Fed speak similar to the central bank's rhetoric amid rate pauses in 2006.
"The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information," the Federal Reserve said in a statement in August 2006.
It won't take long for the Fed to have new data to digest either. On Friday, the April jobs report is expected to show 180,000 nonfarm payroll jobs were added to the US economy last month, with the unemployment rate ticking slightly higher to 3.6%, according to data from Bloomberg.
Josh is a reporter for Yahoo Finance.
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