Fed's Powell speech, CPI inflation to roil stocks this week

The stock market looks great overall, maybe too great.

Thanks to frenzied investors who crave all things tech, the S&P 500, the Nasdaq Composite and the Nasdaq-100 indexes all closed the week at record highs.

Apple ( AAPL ) , Amazon.com ( AMZN ) , Google parent Alphabet ( GOOGL ) , Facebook parent Meta Platforms ( META ) and Microsoft ( MSFT ) also hit new 52-week highs.

Oh, and Tesla ( TSLA ) jumped 27.1% in just one week.

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But the higher prices rise, the risks to the market grow. By the end of this past week, people were talking about it.

They will be again this week as Federal Reserve Chairman Jerome Powell testifies before Congress. Two inflation reports come out Thursday and Friday, and the second-quarter earnings season starts this week.

A hot market is getting hotter

By one measure, the relative strength index, the S&P 500, the Nasdaq and Nasdaq-100 have been trading at overbought levels basically since mid-June.

Also looking overbought are Apple, Alphabet, Microsoft — even Tesla, despite its 29.3% loss in the first quarter.

And we should add Costco Wholesale ( COST ) and Walmart ( WMT ) .

RSI measures how fast a stock is rising compared with history. A stock is overbought if its RSI tops 70. It is ready to pull back the closer it gets to 80. It's oversold if the index drops to 30 or lower.

Microsoft's RSI is at 75. Nvidia's RSI hit 85 in January and 81 in June when its shares peaked at $140.

The RSI levels lead us to a pattern: Big, very big is working; very big with technology added is working even better and is overwhelming everything else.

The Russell 2000 Index is flat so far this year. The Dow Jones Industrial Average is up just 4.5%.

The Nasdaq-100 Index is up 21%. In theory, it's on track to come close to 2023's boffo 54% gain. But at the end of the first half of 2023, the index was already up nearly 39%. It slumped through summer into October before rallying.

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That would suggest the gains seen so far this year will have to accelerate in the second half.

Some analysts think the S&P 500 has farther to go. Julian Emanuel of Evercore ISI has published a 6,000 target. Others aren't so far away. Ed Yardeni thinks 6,000 comes in 2025.

The operating theory is that artificial intelligence, in particular, will change everything.

More on markets and the economy:

• Stocks’ record setting rally may be on fumes
• Consumers tapping out amid sticky inflation and slowing job market
• Weekly Roundup: Reasons to Be Cautious

The few — and the very large — atop the S&P 500

Eight stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, Tesla and Netflix ( NFLX ) — represent 36.3% of the index's total market capitalization of $46.7 trillion.

All are tech or tech-related. Throw in Berkshire Hathaway ( BRK.A ) and Eli Lilly ( LLY ) , and 10 stocks account for almost 40% of the S&P's market cap.

Something will give, sooner or later. Market frenzy led to the dot-com bust. It did with Nvidia, which has fallen 10.6% since that June 20 peak.

The break will hit the most vulnerable stocks and companies. But it will crush many companies. Some $330 billion has been invested in some 26,000 startups that aim to use to artificial intelligence to create the next big thing, the New York Times has reported.

Profits in many are years away — if a company actually has a product to sell.

Will a pullback crush the stock market? That's a different question. Right now, Wall Street is sensing a correction is coming and may be on its way. That means a 10% to 20% decline.

A recession isn't likely, however.

Recession is a broad and emotionally loaded word. Some recessions are relatively slight. Some aren't slight, like the 2008-09 financial crisis. The Covid-induced recession was technically over in a few months but still affects the global economy.

The concern, however, about overheating is at large in markets. Futures trading Sunday afternoon showed the potential for a weak open on Monday.

What the Fed chairman will talk about

But the market hoopla will certainly be on Jerome Powell's mind when he testifies about the economy and interest rates Wednesday and Thursday on Capitol Hill.

The Fed chief's prepared remarks, first to the House and then to the Senate, will probably say the economy is doing reasonably well. Inflation is nearly under control. But he won't say whether the Fed is ready to cut interest rates.

The problem with this description is this:

Many consumers are worried about jobs and inflation. They're worried about home prices, tight housing supplies, high rents and mortgage rates. They're worried about this fall's election.

Even as rates have come down since last fall, building activity is soft, and lumber prices have been falling since March. While gasoline prices are higher, they're not rising as fast as in 2023.

The big economic reports on the week

Two huge reports come on Thursday and Friday.

The Consumer Price Index. It's expected to show prices rising 3.1% year over year, down slightly from May's 3.3%. It gets headlines but is controversial because of the heavy weight of rents in the calculation.

Producer Price Index. This measures prices of stuff that get made. Prices were relatively flat in May and up 2.2% from a year earlier.

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Also coming out:

Small Business Optimism report from the National Federation of Independent Business. It is projected at 89, down from 90.5 in May. Inflation and availability of financing are the biggest concerns.

Consumer sentiment. The University of Michigan Consumer Sentiment report. It was off in June from May, with consumers worried about jobs and inflation the most.

Q2 earnings season starts this week

The second-quarter earnings season starts this week. The important reports come out Thursday and Friday.

Thursday: Delta Airlines ( DAL ) , Pepsico ( PEP ) and Cintas ( CTAS ) . Delta's projections on summer travel will attract attention.

Friday: Big banks and financial institutions. JP Morgan Chase ( JPM ) , Wells Fargo ( WFC ) , Citigroup ( C ) , and money manager BlackRock ( BLK ) are the biggest. The guidance from this group is important. The good news is the industry appears to be stable.

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