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Fed's preferred inflation gauge to test stocks' record highs: What to know this week

A blowout earnings report from AI darling Nvidia (NVDA) sent stocks to record highs last week. New inflation data will test that rally in the coming days.

The S&P 500 (^GSPC) and Dow Jones (^DJI) ended the week up about 1%, while the Nasdaq Composite (^IXIC) added about 0.6%. Both the S&P and Dow closed Friday at record highs.

The largest challenge to markets in the week ahead will likely come from the latest reading of the Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred inflation gauge, on Thursday. A look at consumer confidence and updates on the manufacturing sector will also be in focus during the week.

Quarterly reports from Salesforce (CRM), Lowe's (LOW), Macy's (M), Okta (OKTA), and Best Buy (BBY) are also on deck.

Price check

The last time an inflation report came out before the opening bell, a hotter-than-expected Consumer Price Index (CPI) report rattled markets and sparked a stock sell-off.

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That could happen again. The latest reading on inflation is slated for release on Thursday. Economists expect annual "core" PCE — which excludes the volatile categories of food and energy — to have clocked in at 2.4% in January. Over the prior month, economists project "core" PCE at 0.4%.

A monthly price increase of 0.4% would be a noted increase from the 0.2% seen in the month prior, and speaks to growing fears that inflation might be proving stickier than initially hoped. Notably, this would bring the six-month and three-month annualized inflation numbers, which had been tracking below the Fed's 2% target, back above 2%, per Bank of America's economics team.

Morgan Stanley chief US economist Ellen Zentner noted that an uptick in monthly price increases would set the stage for a "bumpy" inflation picture over the next several months. Markets are now pricing in three interest rate cuts for 2024, in line with the Fed's most recent forecast and down from a former consensus of six cuts seen back in December, per Bloomberg data. 

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Consumer comes into focus

Fourth quarter earnings season is slowing down, but a slew of companies are still set to report, including many in the retail sector. The week ahead will bring a closer look at the consumer with results from Macy's, Best Buy, and TJX Companies (TJX), among others.

To BMO Capital Markets senior retail analyst Simeon Siegel, the key question remains whether consumer spending is losing steam. At this point, he told Yahoo Finance Live, quarterly results have shown Americans are still spending on discretionary goods.

"There's this perception that because of inflation on [consumer] staples items people aren't buying discretionary," Siegel said. "But I'm not seeing that in the results."

WASHINGTON, DC - JANUARY 31:  U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the headquarters of the Federal Reserve on January 31, 2024 in Washington, DC.  The Federal Reserve announced today that interest rates will remain unchanged.  (Photo by Anna Moneymaker/Getty Images)
Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Fed headquarters on Jan. 31, 2024 in Washington, D.C. (Anna Moneymaker/Getty Images) (Anna Moneymaker via Getty Images)

Have we reached market 'euphoria'?

With all three of the major averages trading near record highs and earnings from AI stalwart Nvidia sending a whole sector into rally mode, perhaps the largest question for investors is whether the market has reached a peak.

Citi's US equity strategy team says no.

"Now is not quite the time to panic as sentiment has not reached euphoria," Citi managing director Scott Chronert wrote in a weekly note to clients.

Chronert's team uses an indicator called the Levkovich Index, which takes into account investors' short positions and leverage, among other factors, to determine market sentiment. The current reading is 0.33, below the 0.38 that signals markets have entered euphoria, or an overstretched peak. As seen in the graph below, prior periods where the market extends into euphoric territory are often followed by drawdowns in the market.

Chronert conceded that strong momentum in the market could drive the S&P 500 above the firm's 5,100 year-end target in the short term, but in the long run, more tailwinds will need to come to keep the market pressing higher.

"Longer-term, more earnings upside, and macro tailwinds, like lower rates, may be needed for sustainable [S&P 500] index upside," Chronert wrote.

Weekly Calendar

Monday

Economic data: Dallas Fed Manufacturing Activity, February (-27.4 previously); New home sales, January (684,000 annualized rate expected, 664,000 previously); New home sales, month-over-month, January (+3% expected, +8% previously)

Earnings: Domino's Pizza (DPZ), Freshpet (FRPT), Hims & Hers (HIMS), iRobot (IRBT), Workday (WDAY), Zoom (ZM)

Tuesday

Economic data: Conference Board Consumer Confidence, February (114.8 expected, 114.8 previously); S&P CoreLogic Case-Shiller, 20-City Composite home price index, month-over-month, December (+0.15% previously); S&P CoreLogic Case-Shiller 20-City Composite home price index, year-over-year, December (+5.4% previously)

Earnings: AutoZone (AZO), Beyond Meat (BYND), Cava (CAVA), Cracker Barrel (CBRL), Devon Energy (DVN), First Solar (FSLR), Lowe's (LOW), Macy's (M), Norwegian Cruise Line (NCLH)

Wednesday

Economic data: MBA Mortgage Applications, week ending Feb. 23 (-10.6% prior); Wholesale inventories month-over-month, January (+0.4% previously); Fourth quarter GDP, second estimate (+3.3% annualized rate expected, +3.3% previously); Fourth quarter personal consumption, second estimate (+2.7% annualized expected; +2.8% previously)

Earnings: Advance Auto Parts (AAP), AMC (AMC), Baidu (BIDU), C3.ai (AI), Icahn Enterprises (IEP), TJX Companies (TJX), Marathon Digital Holdings (MARA), Novavax (NVAX), Okta (OKTA), Paramount Global (PARA), Salesforce (CRM), Snowflake (SNOW), Weight Watchers (WW)

Thursday

Economic data: Initial jobless claims, week ended Feb. 24 (201,000 previously); Personal income, month-over-month, January (+0.5% expected, +0.3% previously); Personal spending, month-over-month, January (+0.2% expected, +0.7% previously); PCE inflation, month-over-month, January (+0.3% expected, +0.2% previously); PCE inflation, year-over-year, January (+2.4% expected, +2.6% previously); "Core" PCE, month-over-month, January (+0.4% expected, +0.2% previously); "Core" PCE, year-over-year, January (+2.8% expected; +2.9% previously)

Earnings: Anheuser Busch (BUD), Bath & Body Works (BBWI), Best Buy (BBY), Birkenstock (BIRK), Celsius (CELH), Dell (DELL), Fisker (FSR), Hewlett Packard Enterprises (HPE), Six Flags (SIX), SoundHound (SOUN), Zscaler (ZS)

Friday

Economic news: S&P Global US Manufacturing PMI, February final (51.5 previously); ISM manufacturing, February (49.2 expected, 49.1 previously); ISM prices paid, February (52.9 previously); University of Michigan consumer sentiment, February final (79.6 expected, 79.6 prior)

Earnings: FuboTV (FUBO), Plug Power (PLUG)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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