U.S. Stocks in Focus: Amazon Plunges, Stirring Markets! Which Stocks to Buy Ahead of the FOMC!?

Amazon Slumps 14% as Rates Fear Heightens Optimism Wanes

The Dow Jones Industrial Average in New York fell sharply last week, down 939 dollars (2.77%) to 32,977. The tech-heavy Nasdaq Composite dropped 536 points (4.17%), suffering a notably larger decline.

After delivering earnings, Amazon closed down 14% in what could be described as a crash-like drop. The company posted its first quarterly loss in seven years and sales missed expectations, prompting a harsh investor reassessment and selling pressure.

This selling spilled over into other tech stocks, with Microsoft down 4% and Apple down 4% as well. The Nasdaq index of tech-heavy stocks fell about 4% in this environment.

However, the tech-led declines are not solely due to Amazon's results; they largely reflect the broader overvaluation that had built up since the start of the year.

To curb domestic inflation, the U.S. Federal Reserve (Fed) has signaled a tightening stance, and with expectations of rate hikes, the U.S. 10-year Treasury yield rose to 2.93% last weekend. Higher-yielding U.S. bonds become more attractive to buy, while high-PE stocks like tech names become more prone to selling. Amazon's results delivered a decisive blow in this context.

In this environment, the VIX, a measure of fear among investors, rose to 33 on the 29th. A VIX above 20 indicates rising market anxiety; this level is more than enough to intensify bearish sentiment. As a result, not only tech but a broad range of stocks were sold off.

Does this mean the outlook is wholly bleak? Not necessarily. The reason is that the FOMC (Federal Open Market Committee) meeting results are due on May 4, which could influence sentiment.

Which Stocks Are Worth Buying Ahead of the Post-FOMC Era?

Market expectations for the May FOMC are that tightening measures will be implemented to curb inflation, with the possibility of a 0.50% rate increase and quantitative tightening, with U.S. interest rates doubling relative to typical moves.

There is even talk that in the latter half of the year, the FOMC could consider a more aggressive 0.75% rate hike, and Fed Chair Powell may signal a more proactive stance on tightening in the post-meeting press conference.

If markets conclude that tighter policy will continue, expectations of an economic slowdown could trigger more selling. Yet market participants are hedging against this, anticipating that after the FOMC, market uncertainty may ease. In other words, a post-event buying environment could emerge.

Currently, investors are wary about how the May FOMC results will unfold. If tightening proves stronger than expected, equities could sell off; if looser, stocks could rebound. Still, the direction remains uncertain, and markets generally dislike the risk of unpredictable future asset values.

As a result, many investors are trimming positions before the May FOMC, particularly in assets with higher volatility, such as high-PE tech stocks.

On the other hand, once the May FOMC passes and the tightening measures and future outlook become clearer, the risk of further unexpected shifts may lessen. Investors may then buy into perceived leaders with upside potential. This is what is meant by “buying after the event.”

That said, the momentum of buying does not necessarily continue indefinitely. Even after May, June and July FOMCs loom, so opportunities after the May meeting may be limited to short-term trades lasting a few weeks.

If buying now, many point to stocks benefiting from favorable market conditions and solid earnings. For example, energy-related stocks have benefited from rising crude prices and resource costs, improving earnings. With resources likely to stay high and earnings bolstered, there could be timely opportunities to buy and capture upside.

Dollar-Yen and Japanese Stock Trends: Is There Weekend Trading Appeal?

Last weekend, while U.S. stocks tumbled, the dollar-yen pair remained comparatively resilient.

This is because higher U.S. rates support dollar buying, and the dollar has also become a safe-haven asset amid market volatility and geopolitical tensions.

In Japan, continued inflation weakness and the need to bolster the economy have led to prolonged easy monetary policy, which tends to push the yen weaker. Additionally, higher resource prices widen Japan’s trade deficit, also contributing to yen weakness.

As a result of these factors—dollar strength and yen weakness—the dollar-yen pair has maintained an upward trend. It is currently trading around the 130 yen level, but some market participants are targeting 135, or even 140 yen. With the trend in play, there is selling potential in dollar-yen trades worth considering.

Also notable is the Tokyo stock market's small decline on the Monday after the U.S. stock plunge, suggesting a degree of downside resilience despite the prior day’s drop.

For a long time, Japanese stocks moved in tandem with U.S. market moves, but since this year there have been more cases where U.S. and Japanese stock movements diverge.

The Tokyo stock market's next trading day is Friday this week, and it will be after the May FOMC results. If, as previously described, events pass and market risk-on sentiment strengthens during the Golden Week holidays, Tokyo equities on Friday could favor a buying stance.