Market Insights

Growth stocks like Alphabet are leading again as inflation continues to fade.

The S&P 500 slid 0.3 percent between Friday, May 5 and Friday, May 12, while the Nasdaq-100 rose 0.6 percent. It was the third consecutive week that the technology-heavy Nasdaq outperformed. The trend raises a potentially important question: Is the market returning to its old normal before inflation spiraled higher about two years ago?

Consider the consumer price index, which rose 4.9 percent year-over-year in April. It was the lowest reading since April 2021 and slightly less than expected. Shelter costs also continued to slow rapidly. That may be important because they’ve been a big driver of inflation and are viewed as lagging indicators. Continued easing in this category could potentially cool price pressures in coming months.

The producer price index of wholesale prices was also lower than forecast.

Next, business leaders and ordinary Americans seem to be less worried about rising prices. FactSet observed that just 278 members of the S&P 500 cited the term “inflation” in their latest earnings calls — the fewest in almost two years. Separately, the New York Federal Reserve’s monthly survey found inflation expectations fell to 4.4 percent in April from 4.7 percent in March.

Alphabet and Artificial Intelligence

Alphabet (GOOGL) was one of the biggest gainers movers last week after announcing a series of Artificial Intelligence (AI) features for widely used tools like Search, Gmail and Photos. The moves helped GOOGL catch up to similar innovations by Microsoft (MSFT) and made Communications the top performing sector.

Solar-energy stocks also rallied after the Treasury Department issued favorable rules on tax credits under the Inflation Reduction Act.

Energy and metals fared the worst as crude oil and copper fell. Fears of a slowing economy and weakness in China have pulled commodities lower. Financials also declined as regional banks remained under pressure.

This mix of price action — cyclicals lagging and growth stocks leading — is also reminiscent of conditions before 2022.

Charting the Market

The S&P 500 is still near its 2023 high. The current price action could be different from other moments like February and last August because the index is holding its range instead of pulling back quickly.

Some chart watchers may also notice how the index remained above 4116, the halfway mark of the previous week’s large bearish outside move. More recent sessions featured inside and outside candles. Both patterns may indicate sellers are unable to maintain control.

Next is the support around 4050. The S&P 500 moved slightly under its April low on May 4 but quickly recovered, producing both a false breakdown and a potential double bottom.

Finally, you have the falling trendline along the highs of August and February. Will traders get more bullish if prices break through that resistance?

The Week Ahead: Debt Ceiling, Powell

This week brings a mix of events as earnings season winds down. There could be significant attention on the federal debt ceiling.

Nothing important is scheduled for today.

Tomorrow could bring news on the debt ceiling because President Joe Biden is expected to meet with Speaker of the House Kevin McCarthy.

Retail sales and NAHB’s homebuilder sentiment index is also due. Home Depot (HD) and Baidu (BIDU) report earnings.

Wednesday brings housing starts and building permits, along with crude-oil inventories. Target (TGT) and Cisco Systems (CSCO) issue results.

Initial jobless claims, Walmart (WMT) earnings and existing home sales are on Thursday morning. Applied Materials (AMAT) reports in the post market.

The main event on Friday is an appearance by Fed Chairman Jerome Powell at 11 a.m. ET.