It’s make or break week with series of big events

This week, with central bank meetings, widespread earnings reports and a raft of economic data, will shape the outlook for global markets.

It’s a big week for markets with a raft of events that could make or break prevailing narratives.

From central bank meetings in the US, EU and Japan, economic data including Australian inflation and US GDP, earnings reports from tech giants including Microsoft, Alphabet and Meta, China’s politburo meeting and results from diversified miner Rio Tinto, the week ahead has it all.

Inflation data is the local highlight and, after stronger-than-­expected jobs data last week, quarterly CPI would need to come in well below the consensus estimates of a 6 per cent on-year rise in the trimmed mean in order to allay fear of more rate rises in Australia.

Westpac says domestic inflation is moderating due to government rebates, but there is uncertainty about how much of the moderation is fundamental.

“We are expecting this moderation to continue in the June quarter,” Westpac senior economist Justin Smirk says.

“However, as we have noted in our June quarter CPI preview, there are factors that make us wary of being too complacent and assuming the battle against inflation has been won.

“In particular, the impact of government rebates and subsidies for energy and childcare are ­holding back the significant inflationary pressure from these ­categories.”

Globally, the key event is the FOMC meeting that concludes early on Thursday Australian time.

A 25-basis-point interest rate rise is widely expected, but a further strong rise in US shares after lower than expected US CPI data could leave the market vulnerable to hawkish overtones.

The S&P 500 has risen 30 per cent from its bear market low of October last year. The US benchmark share index has gone 40 consecutive trading days without a 1 per cent decline, the longest streak without a 1 per cent fall since the 74-day streak ending on January 24, 2020.

The Dow Jones Industrial Average has risen 10 consecutive trading days, its longest winning streak since that streak ended on Monday, August 7, 2017.

Perhaps the next most important driver of global markets will be quarterly earnings reports and, more importantly, the guidance in regard to the upside potential from AI through the big US tech players.

Investors will be looking to see how much of the AI hype from the last reporting season is justified. But those chasing other companies on the back of this trend should be careful.

“As we saw in the tech boom, the internet transformed the world, but relatively few companies that were available to invest in around the start of the tech boom survived, and the ones that did survive went down a lot before they recovered,” warns Hugh Giddy, senior portfolio manager of IML’s Australian Share Fund and head of investment research.

AI is an extremely useful technological advancement and an application that could massively change the world, but history shows that technology is very competitive and it’s not easy to tell who will win.

Giddy says the most likely major beneficiaries are the “scale hardware makers”, as AI is intensive in computational power. However, this is now well known, with shares of companies such as Nvidia, AMD and other chip makers already increasing massively in price.

Nvidia shares are up 290 per cent in the past nine months.

“This may mean that the obvious beneficiaries of AI may be largely priced in,” Giddy warns.

“Australia, which has relatively few AI-related tech companies, has also seen a very big increase in tech stocks recently, including many loss-making or more speculative companies.”

So far, 18 per cent of S&P 500 companies have reported second-quarter earnings and 75 per cent have beaten estimates, which is below the five-year average of 77 per cent but above the 10-year average of 73 per cent.

Aggregate earnings so far are 6.4 per cent above estimates, below the five-year average of 8.4 per cent but equal to the 10-year average of 6.4 per cent, ­according to FactSet.

But forward earnings revision breadth has fallen at the fastest pace since late last year, notes Morgan Stanley chief US equity strategist and chief investment ­officer Mike Wilson.

His bearish views on the broader US equity market have been “wrong” this year.

But he remains pessimistic on 2023 earnings, largely because US growth has been bolstered by several factors that may not be sustainable in the second half.

Much warmer weather in January, a fiscal impulse that added an additional $US1 trillion to the budget deficit for the 12 months to July this year, excess savings on household balance sheets, and consumers’ willingness to borrow on credit cards to sustain spending in services and other discretionary categories have all supported the economy.

But the US Congressional Budget Office expects this fiscal impulse to fade significantly over the next 12 months. Meanwhile, the excess savings cushion is running in the US as it is in Australia, and student loan payments are expected to restart for 27 million Americans in the December quarter.

“In short, many of the first-half tailwinds are likely to fade at a time when forward earnings ­estimates, and stocks, are expecting a rebound in growth,” Wilson says.

“So far, earnings do not broadly support the notion that such a rebound is coming.”

More consequential for the global growth and commodity prices outlook will be China’s ­politburo meeting, as while expectations for significant fiscal and monetary policy stimulus are relatively low, there is certainly potential for China to stimulate in response to waning growth