Costco earnings and the Fed’s inflation gauge could create volatility this week

In the upcoming holiday-shortened week, Wall Street will face a series of critical scrutiny as investors’ attention shifts from the extraordinary gains announced by major tech giants to broader concerns about the overall health of U.S. consumers and lingering inflationary pressures.

The recent spring rally was remarkable, largely fueled by stellar earnings from Big Tech companies and anticipation of a potential Federal Reserve rate cut later in the year. This surge in optimism has pushed stock indexes to impressive heights, with the Nasdaq Composite hitting record highs, the Dow Jones Industrial Average breaching the 40,000 mark and the S&P 500 posting its biggest May gain since 2009.

LSEG data shows that first-quarter earnings for S&P 500 companies will increase 8% year-over-year to a staggering $471 billion. This projected growth represents a marked improvement over previous forecasts of approximately 5.7% and is expected to contribute an additional $10 billion to the benchmark index’s performance. Notably, approximately 78% of companies that have seen earnings so far have exceeded Wall Street expectations, which is a record result in line with recent trends.

As the week progresses, one of the key events on investors’ radar will be Costco’s fiscal third-quarter earnings report, which promises to provide valuable insight into the state of American consumers. While only ten companies are scheduled to release first-quarter updates, particular attention will be focused on Salesforce and Costco.

Salesforce, a leading cloud-based software player increasingly reliant on artificial intelligence spending, is expected to report a significant 41.5% increase in net profits in the three months ending in April. However, the market is likely to take a closer look at its full-year update, especially after the disappointing sales growth forecast of 8% to 9% issued in February.

Additionally, Costco’s earnings report will provide key insight into consumer spending trends, especially in light of recent signs of weak retail sales in April and reduced discretionary spending by major retailers such as McDonald’s and Target. Analysts forecast Costco’s revenue to grow 8.2% to just over $58 billion, with expected net income of $3.70 per share.

Consumer spending, a key driver of economic expansion, will also be in focus with the Commerce Department’s release of its second estimate of first-quarter GDP growth, scheduled before the May 30 opening of trading.

Moreover, market participants will carefully monitor inflation dynamics, and the Bureau of Economic Analysis is scheduled to publish the April reading of the PCE price index on May 31. With the expected easing of headline and underlying price pressures indicated by the Commerce Department’s April CPI reading, investors will want to see whether the Fed’s preferred measure, the PCE price index, reflects a similar decline.

Against this backdrop, interest rate traders will adjust their expectations for when the Fed will next cut interest rates. While no move is expected at the upcoming June and July meetings, the probability of a rate cut in the fall is now around 50.5%, up from 72% last month. In addition, bond markets will be active, with auctions of government bonds worth a total of $183 billion in new 2-, 5- and 7-year bonds, the sale of which will begin on May 28.

All in all, Wall Street is facing a week filled with key economic data releases and corporate earnings reports, all amid persistent concerns about inflation and consumer spending. The market’s reaction to these changes will likely shape investor sentiment and influence future market trends.