Markets are entering the new week on edge following last week’s selloff, which saw the S&P 500 decline 1.7%.
The big event this week are Nvidia Corp (NASDAQ:NVDA, ETR:NVD)'s earnings, which investors are using to gauge whether sentiment will stabilize or further deteriorate.
Market volatility fueling stagflation concerns
Despite hitting fresh record highs last week, US equities tumbled on Friday, with the S&P 500 and Nasdaq both dropping sharply.
According to Kathleen Brooks, research director at XTB, several factors triggered the downturn: reports of a new virus in China, weak US PMI data, rising inflation expectations from the University of Michigan survey, and a massive $2.7 trillion options expiry. These factors raised stagflation fears, which are typically negative for equities.
"The implied volatility in the S&P 500, which measures the volatility of the Vix index and is a good measure of how stocks are moving in relation to each other, spiked last week," Brooks said.
"Although this is at a relatively low absolute level, the fact that this is moving higher is worth watching as it could signify a broad-based selloff is brewing."
Treasury yields declined as investors sought safety, with the 10-year yield falling below 4.5%. Oil prices also dropped nearly 3% on Friday, touching a new low for the year.
"The US oil market is currently in contango… a sign that the market remains bearish on oil in the short term," Brooks said.
Key events this week
- Nvidia’s earnings: Nvidia reports earnings on Wednesday, a key test for AI stocks. Despite recent declines, analysts expect revenue to reach $38.26 billion, up from $35.08 billion last quarter. Investors will pay close attention to CEO Jensen Huang’s comments on demand, particularly as Nvidia faces growing competition from China’s DeepSeek AI. Given Nvidia’s history of post-earnings volatility, a strong outlook will be necessary to lift its stock.
- Inflation Reports: Inflation data from the US and Europe will be critical in shaping market sentiment. European CPI data from France, Germany, and Spain are expected to show declining annual inflation rates, which could support a more dovish stance from the European Central Bank. However, rising gas and electricity prices could complicate the outlook.
- PCE report: The Federal Reserve’s preferred inflation measure—is in focus on Friday. Markets expect core PCE to rise 0.3% month-over-month while the annual rate declines to 2.6%. A higher-than-expected reading could reinforce stagflation fears and weigh on equities.
Federal Reserve and economic data
Deutsche Bank highlights several key economic reports, including consumer confidence (Tuesday), durable goods orders (Thursday), and Q4 GDP revisions (Thursday). The Fed is expected to maintain a patient approach, with officials emphasizing that rate cuts are not imminent.