The stock market rally is getting tested this week, as crucial data and events come pouring in. It’s crunch week for investors.

About 20% of the S&P 500 are scheduled to report quarterly earnings this week, including tech giants Alphabet (NSDQ: GOOGL), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), and Meta Platforms (NSDQ: META). Also on deck are Caterpillar (NYSE: CAT), General Motors (NYSE: GM), McDonald’s (NYSE: MCD), and Starbucks (NSDQ: SBUX).

Overall, earnings season so far has been sub-par. As of this writing, the blended earnings decline for the S&P 500 for the fourth quarter of 2022 is -5.0%, according to research firm FactSet. If -5.0% is the actual decline for the quarter, it will represent the first time the index has posted a year-over-year drop in earnings since Q3 2020 (-5.7%).

Wall Street is nervously eyeing the January 31-February 1 meeting of the Federal Reserve’s policy-making arm, the Federal Open Market Committee (FOMC). At the conclusion of the FOMC confab Wednesday, we’ll get the central bank’s latest rate hike announcement as well as a presser by Fed Chair Jerome Powell.

Investors expect the Fed to hike rates by one-quarter of a percentage point, but the real unknown is what Powell might say in the afternoon after the meeting has ended. In the past, his hawkish comments have riled investors.

Wall Street’s biggest fear? It’s grim-faced Jerome Powell, whose bedside manner leaves something to be desired.

For market participants, predicting what the Fed will do means they have to predict how future economic data will look. The latest inflation reports have shown a cooling of prices at the wholesale and consumer levels.

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Economic gauges have pointed to an economy that’s slowing but not imploding. The consensus increasingly anticipates a mild recession at worst and a “soft landing” at best.

Market-moving reports are due this week, including initial jobless claims on Thursday; and nonfarm payrolls, unemployment rate, average hourly earnings, labor force participation rate, S&P U.S. services PMI, and ISM services index on Friday.

China: challenges and opportunities…

You’d think that China’s lifting of COVID restrictions and the weakening of the U.S. dollar would boost companies with greater international exposure, but that hasn’t been the case.

For companies that generate more than 50% of revenues inside the U.S., the blended earnings decline is -3.5%. For companies that generate more than 50% of revenues outside the U.S., the blended earnings decline is -7.3% (see chart).

Driving the underperformance of S&P 500 companies with greater international revenue exposure are earnings disappointments In the technology and communication services sectors.

U.S. and international stocks slumped Monday, amid skittishness over earnings in the U.S. and overseas. However, the main U.S. equity indices closed sharply higher Tuesday as follows:

• DJIA: +1.09%
• S&P 500: +1.46%
• NASDAQ: +1.67%
• Russell 2000: +2.45%

January was a month of strong gains for U.S. equity benchmarks; the S&P 500 racked up its best January in four years. Traders are increasingly optimistic that the Fed will provide good news on Wednesday.

But geopolitical risks remain. As always, the global growth engine of China looms large. China hasn’t been able to perpetuate the exceptional levels of growth the country experienced in recent years, as it struggles with an aging population, a huge debt burden, and a shaky real estate market.

One consequence of China’s former one-child policy is the emergence of a bell curve in terms of the nation’s aging population. That’s raised the question of whether younger generations can provide a sufficient workforce to grow the economy while meeting the demands of an aging population.

Beijing faces an important inflection point in how it manages the economy and society. China in recent weeks grappled with its largest domestic protests since the Tiananmen Square massacre, as citizens decried the country’s now rescinded COVID policies.

That said, China’s economy is still expected to grow by roughly 5% this year, versus a forecast of about 0.2% for the U.S.

If China pulls off that expected growth rate in 2023, it will benefit the commodities market and also the numerous U.S.-based companies whose growth increasingly depends upon Chinese demand, notably Big Tech.

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John Persinos is the editorial director of Investing Daily.

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