Weekend Update - 2/23/25

Last week was a short trading week for the stock market. On Tuesday and Wednesday market was stable but it saw an U turn on Thursday and Friday. The Dow was down about -2.7%, S&P -2.2% and Nasdaq: -2.5%. The question is why was this U turn in the stock market? Ok, here is what happened.

Consumer Sentiment Index (University of Michigan): The index dropped to 64.7 in February from 71.7 in January, a decline of nearly 10% vs. 67.8 expected, hitting a 15-month low. The sharp drop reflected growing consumer pessimism, partly due to fears over tariffs and inflation.

Inflation Expectations (University of Michigan)

One-Year Ahead: Went up to 4.3% in February from 3.3% in January, the highest since November 2023. The Five-Year Ahead inflation expectations went up to 3.5% from 3.2%, the highest since 1995. These jumps signaled heightened consumer concern about rising prices, potentially exacerbated by tariff threats.

S&P Global Flash U.S. Composite PMI Output Index 

Dropped to 50.4 in February from 52.7 in January, the lowest since September 2023. Please note that a reading above 50 indicates expansion. It was driven by a contraction in the services sector, the first since January 2023 despite a rise in manufacturing to an eight-month high. The drop raised fears of an economic slowdown.

Existing Home Sales (January): Declined by 4.9% from December to an annualized rate of 4 million units, worse than the anticipated 4.1 million. This was the slowest pace since October 2023, highlighting weakness in the housing market amid high borrowing costs.

Walmart (WMT) Earnings: The company said that for 2026 it expects EPS of $2.50 to $2.60, well below analysts’ expectations of $2.76. This disappointing outlook from a retail giant underscored softening consumer demand further scared the investors. 

Options expirations: Last Friday was the options expirations for February and lots of options closing activities takes place adding to the volatility. 

Due to the above economic uncertainty investors rotated out of tech stocks to defensive assets like Treasury bonds, defensive stock viz. Utilities, Healthcare etc. Some of the high flying tech stocks were obliterated. 

So, what to expect this week?

No body knows. But here is my view. Well, this week we will see the biggest earnings of the season as Nvidia (NVDA) reports on Wednesday, 2/26, after the close of market. As we know, NVDA is the 1000 pound gorilla for the tech sector and AI stocks, which have been major drivers of market performance lately. A strong report could lift spirits and push tech stocks higher, while disappointment might trigger selling, especially given how much attention is on these high-valuation names and current economic conditions. In addition, another key earnings that could have major impact is Salesforce (CRM) for AI side (software). Also, Snowflake (SNOW) reports this week. And all these earnings are on Wednesday. It would be of paramount importance for the market direction.

Another key factor that would have major impact for the stock market is January Personal Consumption Expenditures (PCE) to be released on Friday. This is the Federal Reserve’s preferred inflation gauge. If it comes in softer than expected, it could fuel hopes of looser monetary policy, which tends to boost stocks. But if it’s hotter than anticipated, it might stoke fears of tighter rates, putting downward pressure on the market. Other data like housing prices, consumer confidence, and GDP revisions could also play a role, though they’re usually less of a headline grabber than PCE.

Earnings to watch this week: NVDA, CRM, SNOW.

Bottomline: So, all in all, this is going to be an extremely important week. And it's better to be mentally prepared as market may have major volatility either way.