Why the next two weeks will make or break the stock market

U.S. stocks started off a key week of trading with a Monday morning rise. Treasury yields are holding steady, oil prices are climbing but not spiraling out of control, and tech stocks are looking to stanch a notable week of declines ahead of a crucial set of earnings.

The early Monday gains, however, mask the stakes that are likely on the table over the coming weeks. The heaviest slate of second-quarter earnings and big tech updates are on tap, as well as a Federal Reserve policy meeting, and continued attacks between the U.S. and Iran are putting the focus back on energy markets.

All that, of course, comes amid a prolonged stall in gains for the S&P 500, which hit its all-time peak in early June but has been largely hovering around the 7500-point mark for much of the past two months.

Tech stocks, meanwhile, are in retreat, with the PHLX Semiconductor index trading in bear market territory and the Nasdaq Composite now more than halfway toward correction after making an all-time high on June 2.

Still, stocks are looking at modest opening bell gains to kick off a week highlighted by more than 80 S&P 500 earnings reports, capped by Alphabet’s after-the-close update on Wednesday and Intel’s premarket publication the following day.

Collective S&P 500 profits for the second quarter are forecast to rise by around 26% from last year to just over $707 billion, according to LSEG estimates, a solid $8 billion boost from earlier projections thanks in part to last week’s set of blowout trading and underwriting numbers from Wall Street’s biggest banks.

But the weakening tech trade—characterized by the 20% pullback in chip stocks, the Nasdaq’s 2.6% decline on the month, and jitters linked to the development of new, and cheaper, AI models in China—has investors on edge.

As does the recent jump in global oil prices, which lifted Brent crude futures by more than 15% last week, and took the contracts north of $90 a barrel in early Monday dealing.

The escalation of U.S. strikes on Iran, following the death of two servicemen over the weekend, could soon weigh on equity markets over the coming weeks, according to Jonas Goltermann, chief markets economist at Capital Economics, “especially if even strong tech earnings reports continue to be met with skepticism.”

“If shipping through the Strait remains disrupted, it seems likely that both energy prices and option-implied oil price volatility will climb further,” he said. “At some point, that would generate more significant spillovers to broader financial markets.”

At least a portion of that concern is starting to show in volatility indexes, including the Cboe Group’s VIX, which has risen more than 22% from its mid-month trough to around 18.35 points heading into the start of trading on Monday. At that level, traders are expecting daily swings of 1.15%, or 86 points, for the S&P 500.

Adam Turnquist, chief technical strategist at LPL Financial, also notes that “over the past 30 years, the VIX has most often established its annual low during July before trending higher into October, reflecting a historically strong seasonal period for volatility.”

“A busy event calendar including the midterm elections, earnings season, important monetary policy decisions, and lingering geopolitical tensions could be catalysts for volatility to trend higher over the coming months,” he added.

At present, markets seem more aligned with a shifting of risks than a capitulation to them.

An equally weighted index of the S&P 500 is up more than 2.4% since the end of May, compared to a 1.6% decline for the market-cap-weighted benchmark, while sector performance over the past month has been dominated by gains in health care, energy and financial stocks.

But other markets show worrying signs.

Benchmark 10-year Treasury notes yields traded at 4.567% on Monday, a 20-basis-point increase since the start of the month, as bets on a Fed rate hike in September hold steady at around 60%.

Japan’s yen is trading near the lowest levels against the dollar in 40 years, and some analysts suggest a big intervention from the government could come over the coming weeks. A similar move to weaken the currency in 2024 triggered a 6%-plus pullback for the S&P 500 over just a handful of trading days. That said, smaller, targeted efforts earlier this spring were largely ignored by U.S. markets.

With tech losing steam, oil back on the march, and risk markets showing worrying signs into August and September—the market’s two weakest months of the year, according to Jeff Hirsch of the Stock Trader’s Almanac—the next two weeks are likely to prove crucial.

Write to Martin Baccardax at [email protected]