ASX set for bright start to the week

The Fed is widely expected to raise its federal funds rate on Wednesday to its highest level since 2001. But the hope is that will be the final increase of the cycle because inflation has been cooling since last summer. The federal funds rate started last year at virtually zero.

To be sure, the 18.1 per cent jump for the S&P 500 this year also has critics saying the rally has come too far, too fast. The risk of recession remains because inflation and interest rates remain high.

When Fed Chair Jerome Powell speaks on Wednesday after the central bank’s decision on rates, economists at Deutsche Bank say he “is likely to emphasize that further evidence is needed to have confidence inflation will be tamed.”

Besides the Fed meeting, next week will also feature earnings reports from three of the “Magnificent Seven” companies behind the majority of the S&P 500’s gains this year. Alphabet, Meta Platforms and Microsoft will report their earnings, and expectations are high after they all soared more than 35 per cent so far this year.

Another one of the seven, Tesla, slumped sharply on Thursday despite reporting stronger profit and revenue than expected on fears about upcoming growth. It helped drag the S&P 500 to a loss and the Nasdaq composite to a drop of 2.1 per cent.

The top stocks have become so big and their movements have become so influential over the market that Nasdaq is rebalancing its Nasdaq 100 index before trading begins Monday, to lessen the impact some stocks have on the overall index.

The seven stocks, which also include Amazon, Apple and Nvidia, are collectively trading with stock prices that are 44 times higher than their earnings per share over the last 12 months, according to Savita Subramanian, equity strategist at Bank of America.

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That’s an expensive level compared with history, but the other stocks in the S&P 500 are trading at a more reasonable-looking 17 times earnings. The stock market’s gains have broadened out a bit recently, and Subramanian said in a BofA Global Research report that she expects that to continue.

In the bond market, Treasury yields were mixed.

The 10-year Treasury yield fell to 3.83 per cent from 3.86 per cent late Thursday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, ticked up to 4.85 per cent from 4.84 per cent.

In markets abroad, stocks were mixed across Europe and Asia.

Taiwan’s Taiex fell 0.8 per cent after TSMC, the world’s biggest manufacturer of computer chips, said it expects its sales to fall 10 per cent this year as demand wanes. It also said it would not meet a 2024 target for starting production at a factory under construction in Arizona.

AP