Tech stocks led gains on Wall Street, with earnings for the most-influential segment of the U.S. equity market about to get underway in a test of the S&P 500’s 12 per cent surge from its October low.

Marquee names like Microsoft Corp. and Intel Corp. are set to report results that will help shape the fate of a sector that last year faced a reckoning amid higher rates. While some traders are bracing for the group’s worst earnings slump since 2016, pessimism has recently faded as tech firms focus on cost cuts and inflation shows signs of easing — with the Nasdaq 100 having its best two-day rally since November.

The latest notable company to announce job cuts to lower expenses was Spotify Technology SA, which climbed on plans to slash about 6 per cent of its employees. Interestingly enough, despite the positive reaction to the industry’s cost-saving measures, not everyone is convinced that’s a good sign. Bank of America Corp. strategists including Savita Subramanian note that could herald waning tech demand.

It’s also worth noting that among all tech groups, chipmakers were by far the best performers Monday thanks to a call from Barclays Plc upgrading Advanced Micro Devices Inc. and Qualcomm Inc., which spurred a 5 per cent jump in the Philadelphia Semiconductor Index. The S&P 500 crossed its key 4,000 mark — seen by several technical analysts as a make-or-break level that could define the gauge’s direction. 

“We’re likely to find out soon whether this latest run is just another one of many false alarms or if it’s really ‘the one’,” according to strategists at Bespoke Investment Group. “One thing bulls have working in their favor is that following the last unsuccessful test in mid-December, the market didn’t go on to make new lows.”

Now one aspect to keep in mind is that stocks aren’t necessarily cheap at this stage. In fact, the S&P 500 may look expensive compared with historical levels given that earnings estimates have been falling for a while.

If the U.S. equity benchmark in fact bottomed on Oct. 12, that would be one of highest valuation troughs ever, noted David Bahnsen, chief investment officer of his namesake wealth management firm. The S&P 500 was trading around 17 times relative to earnings at that time — and bear-market bottom multiples are historically much lower than that, he added.

“Investors should not assume that the easy times in the market are coming back,” Bahnsen said. “We expect enhanced volatility and a focus on cash flow and quality for the foreseeable future.”

To Matt Maley at Miller Tabak + Co., the S&P 500’s current valuations don’t leave “a lot of leeway for disappointments.” And with higher interest rates, it’s going to be tough for the markets to keep rallying should earnings projections for 2023 come down further, he added.

Early fourth-quarter results show that the companies in the U.S. equity benchmark are on track to miss expectations by 1 per cent after analysts lowered their projections, BofA’s Subramanian wrote.

The recent weakening of economic data alongside the anticipated decline in earnings expectations and weak 2023 guidance are pointing to markets that are likely to move lower, according to JPMorgan Chase & Co. strategists led by Marko Kolanovic.

“A recession is currently not priced into equity markets,” they added.

Optimism around a less hawkish Federal Reserve, China reopening and a weaker dollar is already priced in, according to Morgan Stanley’s strategist Michael Wilson. Nevertheless, he does expect a stock rally in 2024 following a challenging 2023 as the U.S. economy suffers through an earnings recession.

“Markets have leapt ahead this year, driven by China’s reopening, falling energy prices and slowing inflation,” strategists at BlackRock Investment Institute wrote. “This has spurred hopes of a soft economic landing, plummeting inflation and interest rate cuts. We see markets vulnerable to negative surprises – and unprepared for recession.”

As the Fed enters the blackout period ahead of its Jan. 31-Feb. 1 meeting, markets have priced in a smaller 25-basis-point hike. Even as several officials say rates must peak above 5 per cent and stay higher for longer, traders remain skeptical. They still don’t believe policymakers will go above 5 per cent, and see the Fed cutting rates aggressively by the end of the year, according to Anna Wong at Bloomberg Economics.

Meantime, Treasury Secretary Janet Yellen said she’s encouraged by progress on inflation, with energy prices and supply-chain issues easing across the globe even as the U.S. labor market remains strong.

“Investors should be careful to temper their expectations for premature rate cuts, as the Fed will likely need to keep a restrictive footing on monetary policy throughout the year to fight inflation,” said Jason Pride, chief investment officer of private wealth at Glenmede.

Treasury yields rose and the dollar was little changed.

Key events this week:

• PMIs for U.S., euro area, UK, Japan, Tuesday
• Richmond Fed Manufacturing, Tuesday
• ECB President Christine Lagarde delivers a video message on “the euro as a guarantee of resilience,” Tuesday
• U.S. MBA mortgage applications, Philadelphia Fed non-manufacturing activity, Wednesday
• U.S. fourth-quarter GDP, new home sales, initial jobless claims, Thursday
• U.S. personal income/spending, PCE deflator, University of Michigan consumer sentiment, pending home sales, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 2.2 per cent
• The Dow Jones Industrial Average rose 0.8 per cent
• The MSCI World index rose 1 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.1 per cent to US$1.0867
• The British pound fell 0.2 per cent to US$1.2372
• The Japanese yen fell 0.8 per cent to 130.69 per dollar

Cryptocurrencies

• Bitcoin rose 1.9 per cent to US$23,030.2
• Ether rose 0.4 per cent to US$1,635.31

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.52 per cent
• Germany’s 10-year yield advanced three basis points to 2.21 per cent
• Britain’s 10-year yield declined two basis points to 3.36 per cent

Commodities

• West Texas Intermediate crude was little changed
• Gold futures rose 0.2 per cent to US$1,948.60 an ounce