Optimism over first-quarter earnings has faded. Investors last week were cheered by the surprising outperformance of the behemoth banks, but since then the results from other sectors have been mixed at best.

At the same time, the Federal Reserve’s inflation-fighting campaign to dampen the economy is working. This week, we’ve been getting downbeat reports on manufacturing, construction, and jobs.

As the economy and corporate earnings decelerate, what’s left to keep equities afloat? You guessed it. Hopes that the Fed will ease up on rates. But that’s a tenuous rope to cling to.

That said, there’s still somewhat of a “Goldilocks” effect with the employment situation. Initial jobless claims are ticking higher, but the unemployment rate of 3.5% is the lowest since Neil Armstrong landed on the moon in 1969.

Speaking of space exploration, Elon Musk’s SpaceX experienced a setback Thursday, when its most powerful rocket, the Starship, exploded in midair on a test flight minutes after launch in Texas. Several engines shut off when they shouldn’t have.

An engineer with the company told the press that the rocket explosion was “a rapid unscheduled disassembly.” He uttered those words with a straight face.

Also crashing to earth Thursday, like the ill-fated Starship, were shares of Tesla (NSDQ: TSLA). The electric vehicle maker’s first-quarter operating results were disappointing, and CEO Elon Musk’s plans for slashing prices are unnerving investors. TSLA shares plunged nearly 10% Thursday.

Members of Tesla’s board expressed annoyance on Friday with Musk’s lack of focus on the company. Tesla’s market value has now fallen below that of Meta Platforms (NSDQ: META) for the first time in two years. As Musk fiddles with his vanity project Twitter, Tesla is burning.

Tesla hasn’t been the only company to deliver a lousy Q1 report card. Several operating results in recent days have missed expectations, weighing on stocks.

Read This Story: When Assessing Fed Policy, Is Wall Street Hooked on Hopium?

To be sure, it’s a bullish sign that the S&P 500 currently hovers above its 50- and 200-day moving averages. However, economic reports arrived Friday that were a mixed blessing.

Business activity in the U.S. private sector expanded at a strengthening pace in April, with the S&P Global Composite Producer Manufacturers Index (PMI) rising to 53.5 (flash) from 52.3 in March. This reading came in better than the market expectation of 52.8 (see chart).

The Friday report’s key findings:

• U.S. PMI Composite Output Index at 53.5 (March: 52.3), an 11-month high.
• U.S. Services Business Activity Index at 53.7 (March: 52.6), a 12-month high.
• U.S. Manufacturing Output Index at 52.8 (March: 50.2), an 11-month high.
• U.S. Manufacturing PMI at 50.4 (March: 49.2), a 6-month high.

The main U.S. stock market indices slumped in early morning trading Friday, as investors interpreted the latest economic data as an assurance that the Fed would stay in tightening mode.

But then, in the final hour of trading, stocks reversed course and clawed into the green, as investors anticipated better news when a slew of Big Tech earnings reports are released next week. The indices closed on Friday as follows:

• DJIA: +0.07%
• S&P 500: +0.09%
• NASDAQ: +0.11%
• Russell 2000: +0.10%

The top performing sectors were consumer discretionary and staples, and health care. Treasury yields popped higher, with the benchmark 10-year Treasury note climbing to 3.57%. Tesla rebounded to close 1.28% higher. European stocks also closed higher, as overseas investors digested a mix of good and bad economic news akin to the data in the U.S.

In a positive technical sign, the CBOE Volatility Index (VIX) slipped 2.33% by market close on Friday to land at 16.77. A VIX reading below 20 generally suggests a perceived lower-risk environment.

We’ll know in a few days whether the market will reach a positive inflection point. The next meeting of the Fed’s policy-making Federal Open Market Committee (FOMC) is scheduled for May 2-3.

The oddsmakers on Wall Street are placing an 83% chance on the Fed boosting rates by another 0.25% in May, for a fed funds target rate in the range of 5% to 5.25%.

But there’s a growing consensus that a rate cut is in the cards for the autumn. This expectation that we’ll get a cut in 2023 contradicts the signals we’ve been getting from Fed hawks, who keep pounding the table that the inflation fight is far from over.

What’s more, if history is any guide, the Fed would pause before it cuts, and on average the period between a pause and an actual cut is six months.

But there’s good news, if you’re a patient investor. Since 1989, stocks have strongly rallied soon after the hiking cycle has ceased. Ride out the volatility; stick to your long-term plan.

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John Persinos is the editorial director of Investing Daily.

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