Stocks slid over the past week as fears sticky inflation may prevent the Federal Reserve from cutting interest rates gripped markets.
For the week, the Nasdaq (^IXIC) fell nearly 0.6% while the benchmark S&P 500 (^GSPC) slid more than 1.6%. The Dow Jones Industrial Average (^DJI) sank almost 2.5%, driven by a slump in bank stocks on Friday as quarterly earnings reports failed to impress investors.
More updates on the state of corporate America will greet investors in the week ahead. Results from Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS) will round out earnings from big banks while reports from United Airlines (UAL) and Netflix (NFLX) also highlight the week.
In economic news, an update on retail sales in March is scheduled for Monday in what’s expected to be an otherwise quiet week for economic data.
Last week we noted continued stronger-than-expected data from the labor market had an increasing number of economists questioning if the Federal Reserve will cut interest rates in June. After another week of inflation data that showed price increases aren’t declining as quickly as many hoped, many economists now see the Fed holding rates steady until at least the fall.
The economics teams at Bank of America and Deutsche Bank, which had previously seen easing starting in the early summer, now believe the Fed will cut for the first time in December, meaning just one total cut for 2024.
“We no longer think policymakers will gain the confidence they need to start cutting in June,” Bank of America US economist Michael Gapen wrote in a research note on Thursday. “We expect inflation to remain relatively firm in the near term. We are forecasting 0.25% m/m for core PCE in March and April. This will make a cut as early as June or September unlikely absent clear signs of labor market deterioration.”
Consensus is now pricing in two interest rate cuts this year, per Bloomberg data. And Deutsche Bank chief US economist Matthew Luzzetti noted that even that more tempered outlook might not come to fruition in 2024.
“Further disappointing inflation data or an election outcome that delivers fiscal stimulus and / or policies that could lift inflation (e.g., trade or immigration policies) would argue for no rate cuts this year and into 2025,” Luzzetti wrote.
With consensus now seeing the Fed holding interest rates higher for longer, economists will continue to watch closely for any signs that the resilience in the US consumer is dwindling.
A fresh reading on that trend is set to greet investors on Monday with the March retail sales report. Economists expect that retail sales increased 0.4% in March from the prior month. This would extend the rebound seen in February after retail sales sank 1.1% in January.
“We do not think consumer spending is poised to slow meaningfully, especially as wage growth remains solid,” Wells Fargo’s economics team wrote in a note to clients. “Real-time credit card spending data show consumer outlays remaining above their pre-pandemic trend in March.”
The first set of earnings from some of America’s largest financial institutions did little to impress investors. JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) all reported declining net interest income during their quarterly reports.
JPMorgan maintained its 2024 net interest income guidance of $90 billion, but analysts had expected guidance to increase in a range of $2-$3 billion, per CNBC.
“Markets have priced in a higher probability of the Goldilocks scenario playing out this year, introducing more downside risk to ‘good but not good enough’ news,” Citi US equity strategist Scott Chronert wrote in a note to clients on Friday. “While very early, the first set of 1Q reports from the banks highlights this risk of guidance falling short of lofty implied growth expectations, even as the overall fundamental picture remains healthy.”
More banks, including Goldman Sachs, Bank of America, and Morgan Stanley, are expected to report earnings early next week as investors continue to track how higher interest rates are impacting the financial services sector.
Entering the first full week of quarterly updates for the first quarter, Wall Street strategists have their eyes on how specifically companies are driving earnings growth.
Over the past year, many companies utilized layoffs and other tactics to keep margin growth intact while demand lagged. Strategists are looking for that narrative to change this quarter for the market rally to continue and earnings growth to support recent signs of an accelerating US economy.
“You’re kind of at the point of the cycle where you really need to start seeing revenue growth inflecting higher, and if you don’t that’s going to become more of an issue,” Charles Schwab senior investment strategist Kevin Gordon told Yahoo Finance. “Companies that cut labor costs aggressively last year via layoffs, you can only do that for so long. Eventually you have to see actual demand come back into play.”
S&P 500 revenue for the first quarter is expected grow 3.4%, below the 10-year average of 5.1%, per FactSet data.
Given the market’s recent slump on fears inflation’s downward path may have stalled and the Fed could cut rates less than expected, how this earnings season plays out will be increasingly “critical” for the market rally, according to BlackRock global chief investment strategist Wei Li.
“Earnings have come to the rescue because markets are up year to date, despite the hawkish repricing,” Li told Yahoo Finance. “So we’ll see if earnings will continue to come to the rescue of hawkish repricing, even as the bar has increased as well for earnings.”
Monday
Economic data: Empire Manufacturing, April (-5 expected, -20.9 prior); Retail sales, month-over-month, March (+0.4% expected, +0.6% previously); Retail sales ex auto and gas month-over-month, March (+0.3% expected, +0.3% previously); NAHB housing market index, April (51 expected, 51 previously)
Earnings: Charles Schwab (SCHW), Goldman Sachs (GS)
Economic data: Building permits month-over-month, March (-0.3% expected, 2.4% previously); Housing starts month-over-month, March (-2.7% expected, +10.7% previously); Industrial production, month-over-month, March (+0.4% expected, +0.1% prior)
Earnings: Bank of America (BAC), BNY Mellon (BK), Interactive Brokers Group (IBKR), J.B. Hunt (JBHT), Johnson & Johnson (JNJ), Morgan Stanley (MS), PNC (PNC), United Airlines (UAL), United Health Group (UNH)
Economic data: MBA Mortgage Applications, week ending April 12 (+0.1% previously)
Earnings: Alcoa (AA), ASML (ASML), Abbott Labs (ABT), Citizens Financial Group (CFG), CSX (CSX), Discover Financial Services (DFS), Las Vegas Sands (LVS), Synovus (SNV), Travelers (TRV)
Economic data: Initial jobless claims, week ending April 13 (211,000 previously); Philadelphia Fed Business Outlook, April (0.0 expected, 3.2 previously); Leading Index, March (-0.1% expected, +0.1% previously); Existing home sales, month-over-month, March (-5.1% expected, 9.5% previously)
Earnings: Netflix (NFLX), Alaska Airlines (ALK), Ally Financial (ALLY), Blackstone (BX), D.R. Horton (DHI), KeyBank (KEY), PPG (PPG), Truist (TFC), TSMC (TSM), Union Pacific (UNP), Western Alliance (WAL), WD-40 (WDFC)
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