Stocks appear to be starting out the last trading week of the month in mixed fashion amid a final round of second-quarter earnings reports. Following four consecutive losing weeks, markets have now posted back-to-back winning stretches, recovering nearly all of the lost ground from the recent correction. The decisive turnaround has mainly been led by technology stocks, which tend to be hit hardest during volatile periods.

It seems that sharp move lower in early August was a buying opportunity. During bull markets, quick declines should be embraced; they present us with opportunities to add exposure at lower risk levels.

The critical surge higher bears some stats that are worthy of repeating. The S&P 500 has now risen in 10 of the past 12 sessions and remains less than 1% away from its all-time high set in July. It’s also been 10 of 12 for the Nasdaq, but the tech-heavy index has a bit more room to go in terms of all-time highs (about 5% from that level).

Keep in mind that as we head back near historic highs, these levels will be a logical place of resistance. It wouldn’t be too shocking to see a slight pause or retraction, particularly after the recent run-up.

Markets Cheer Powell’s Dovish Tone

Late last week, market participants rejoiced as Fed Chief Jerome Powell cemented the first interest rate cut of the cycle. In a statement that echoed the central bank’s confidence in its fight against inflation, Powell said “the time has come” to begin cutting interest rates.

At the Fed’s annual economic symposium, Powell stated that the “timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Powell’s exact language has a tendency to move markets; we saw the recent rotation into rate-sensitive pockets of the market strengthen, with small-caps leading the way.

Expect more of that rotation throughout the remainder of the year.

Minutes from the July Fed meeting also showed that the “vast majority” of policymakers felt it would be appropriate to ease monetary policy at the next meeting. The Fed nearly always does what is expected, and right now markets are pricing in a 100% probability of a cut next month.

Context matters when it comes to rate cuts and stock performance. Dating back to 1921, when the Fed has avoided recession, stocks have ripped higher, with the Dow up an average of 24% one year following the first cut. When the economy has been in recession within a year of the 1^st cut, the Dow has been weak beforehand but still up 10% on average a year later.

More importantly, the Fed has made it clear that it plans to cut rates slowly, which is music to bulls’ ears. The S&P 500 widely outperforms in the 1^st year of slow easing cycles versus fast ones. Why is that the case? Because in fast easing cycles, it usually means something has gone wrong (like in 2001 and 2007-2008).

We also heard from Philadelphia Fed President Patrick Harker last week, who advocated for a slow interest rate cut cycle. Stocks have historically fared best under slow cycles, which are typically indicative of a resilient economy and increase odds of a soft landing.

Top Tech ETF Finds Support at Crucial Levels

The Technology Select SPDR ETF (XLK Quick QuoteXLK - Free Report) , which is comprised of the most innovative, non-financial companies based on market capitalization, is led by ‘Mag 7’ members with Nvidia, Microsoft, and Apple comprising nearly half of the total ETF weighting. Needless to say, the XLK ETF has been a key tech fund and steadily outperformed during this latest bull market.

As we can see below, the last two times the XLK ETF slipped below its 200-day moving average (marked in blue) coincided with bear markets (in 2020 and 2022):

Image Source: StockCharts

The pandemic-induced plunge in 2020 turned around very quickly and was marked by the fastest recession in history. Meanwhile, a surge in inflation led to a nasty bear market two years ago, but we narrowly avoided a technical recession (even though the economy did experience two quarters of negative GDP growth).

The XLK ETF quickly found support at the pivotal technical level this time around, and it appears the economy is on much sounder footing relative to the prior two instances. The latest Atlanta Fed GDPNow real GDP estimate for the third quarter currently sits at 2%; this would follow the 1.4% growth during the first quarter and the (advance) estimate of 2.8% during the second quarter.

Second-Quarter Earnings Season Comes to an End

The Q2 earnings season is all but wrapped up. Including all of last week’s announcements, we have seen Q2 results from 478 S&P 500 members, or 95.6% of the index’s membership. Total earnings for these index members advanced 8% from the same period last year on 5.1% higher revenues.

The figures point to yet another solid quarter for corporate earnings. We’ll still hear from a number of important companies this week such as Lululemon, The Gap, CrowdStrike, Salesforce, HP, and Dell.

Of course, the announcement that everyone has been waiting for this week is from semiconductor giant Nvidia (NVDA Quick QuoteNVDA - Free Report) , the last Mag 7 member to deliver its Q2 results. On Wednesday after the bell, Nvidia is expected to deliver earnings of 63 cents per share, which would mark a 133% jump from the year-ago period. Revenues are anticipated to surge 109% to $28.24 billion.

These are phenomenal growth rates for a company of this size, and it’s no wonder that Nvidia’s stock continues to reward investors with massive outperformance. The stock was the leading performer last year out of all S&P 500 constituents.

Nvidia has surpassed earnings estimates in each of the past six quarters. Estimates for the second quarter have remained fairly steady over the past 60 days. The company has delivered a trailing four-quarter average earnings surprise of 18.4%.

NVDA stock is currently a Zacks Rank #3 (Hold). Our proprietary Zacks Earnings ESP (Expected Surprise Prediction) model does not conclusively predict another beat for the upcoming announcement.

Shares have exploded more than 150% year-to-date and regained key levels following the latest correction. The stock continues to trade above its 50-day and 200-day moving averages, but is pulling back a bit today heading into the earnings announcement.

Image Source: StockCharts

Bottom Line

The back-and-forth action we’ve seen in August reflects enhanced volatility, but that’s the nature of the market.

Another important week lies ahead with significant earnings implications and key economic data. Keep in mind that we’re entering a seasonally weak period in the September-October timeframe. But it’s important to maintain flexibility and incorporate no assumptions as to what the future holds.

With the Fed set to lower rates, a continued bright spot has been small-caps; the Russell 2000’s outperformance has picked up in recent sessions. The longer the move persists, the more relevant it becomes.

Still, technology and growth stocks have recuperated much of the lost ground from earlier in the month. Make sure to keep an eye on NVDA stock this week as its results will have broad implications on the semiconductor industry as well as the AI space.