Investors are bracing for a critical week that could shape the future of U.S. stocks. Big tech companies are set to report earnings, the Federal Reserve holds a policy meeting and key employment numbers are due to be released. It follows a period of market volatility that saw the S&P 500 and Nasdaq Composite Index suffer their biggest one-day losses since 2022 amid disappointing earnings reports from Tesla and Google’s parent company Alphabet.

Tech revenue in the spotlight

A recent rally in tech stocks stalled in July, and next week’s earnings reports from major players including Microsoft, Apple, Amazon and Meta Platforms (Facebook’s parent company) could further erode investor confidence.

The strong performance of tech stocks this year has lifted the market, but has also raised concerns about their high valuations. If these companies fail to meet earnings expectations, it could lead to more market turbulence.

Federal Reserve Meeting

Investors are also focused on the Federal Reserve meeting next Wednesday. They will be looking for hints about future rate cuts, which many expect to begin in September. The Fed’s view of the economy can significantly influence the direction of the market.

Employment data

Employment data, including the monthly jobs report, will be released at the end of the week. This will help determine whether the labor market is weakening more than expected. Strong employment data can bolster the case for continued economic resilience, while weaker data can raise concerns about the health of the economy.

Market sentiment

Bryant VanCronkhite, senior portfolio manager at Allspring, highlighted the current nervousness in the market. He noted that investors are questioning the high prices of tech stocks, but also fear the Fed’s failure to prevent an economic downturn. This uncertainty has led to significant market reactions.

Sector shifts

There has been a recent shift away from high-flying tech stocks and toward other sectors such as small caps and value stocks, like financials. The Russell 1000 Value index is up more than 3% this month, while the Russell 1000 Growth index is down almost 3%. The small-cap-focused Russell 2000 is up almost 9%, while the S&P 500 is down more than 1%.

Looking forward

Keith Lerner, chief market strategist at Truist, suggested that even strong earnings may not be enough to lift the market in the short term. He believes the recent pullback in tech stocks means any gains could be quickly sold by investors.

Economic outlook

Any sign that the Fed is worried about a worse-than-expected economic downturn could unsettle investors. Mixed economic signals, such as faster-than-expected GDP growth coupled with declining manufacturing activity, add to the uncertainty.

Markets currently expect the Fed to begin cutting rates in September, with a total of 66 basis points of cuts by the end of the year, according to CME’s FedWatch Tool.

Charles Lemonides, head of hedge fund ValueWorks LLC, sees the recent market selloff as a healthy correction. He believes that growth stocks will propel the market to new highs in the long run. However, the coming week will be crucial in determining the market’s short-term direction.