Stocks have fallen over the past week as concerns gripped the market that persistent inflation could prevent the Federal Reserve from cutting interest rates.
For the week, the Nasdaq (^IXIC) is down nearly 0.6%, while the benchmark S&P 500 (^GSPC) is down more than 1.6%. The Dow Jones Industrial Average (DJI) fell about 2.5%, led by declines in bank stocks, after Friday's quarterly earnings report did not impress investors.
Further updates on the state of American companies are expected to be released to investors over the coming week. Reports from Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS) round out big bank earnings, while reports from United Airlines (UAL) and Netflix (NFLX) also led this week. This is a noteworthy point.
In economic news, an update on March retail sales is expected on Monday, in what is expected to be a slow week for economic data.
Expectations for interest rate cuts are fading
Last week, we noted that a growing number of economists were questioning whether the Federal Reserve would cut interest rates in June as labor market data continued to beat expectations. After another week of inflation data showing that price increases are not falling as quickly as most expected, many economists now think the Fed will keep rates on hold, at least until they fall. .
Economic teams at Bank of America and Deutsche Bank had previously expected easing to begin in early summer, but now believe the Fed will cut rates for the first time in December, resulting in only one total rate cut in 2024. ing.
“We no longer believe policymakers will gain the confidence needed to begin cutting rates in June,” Michael Geipen, U.S. economist at Bank of America, said in a research note Thursday. “We expect inflation to remain relatively steady in the short term. We expect core PCE to be 0.25% month-on-month in March and April, with clear signs of deterioration in the labor market. If not, it is unlikely that interest rates will be cut as early as June or September.
The consensus is currently pricing in two rate cuts this year, according to Bloomberg data. And even that more lenient outlook may not materialize in 2024, said Matthew Ruzzetti, chief U.S. economist at Deutsche Bank.
“Further disappointing inflation numbers and an election result that brings fiscal stimulus and other policies that could push up inflation (such as trade and immigration policies) could lead to no interest rate cuts between this year and 2025,” Ruzzetti said. will be claimed.”
consumer report card
The consensus now is that the Fed will keep long-term interest rates high, and economists will continue to closely monitor U.S. consumers for signs of weakening consumer resilience.
Investors will receive new information on this trend in Monday's March retail sales report. Economists expect retail sales to rise 0.4% in March from the previous month. This would lengthen the recovery seen in February after retail sales fell 1.1% in January.
“We do not see a significant slowdown in consumer spending, especially given strong wage growth,” Wells Fargo's economics team said in a note to clients. “Real-time credit card spending data shows consumer spending is above pre-pandemic trends in March.”
Bank profits show 'risk' of guidance
The first financial results released by some of America's largest financial institutions have left investors with little excitement. JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) all reported declines in net interest income in their quarterly reports.
According to CNBC, JPMorgan kept its 2024 net interest income outlook unchanged at $90 billion, although analysts had expected the outlook to increase in the range of $2 billion to $3 billion.
“Markets are pricing in a Goldilocks scenario likely to play out this year, with 'good but not good enough' news creating further downside risks,” Citi U.S. equity strategist Scott Kronert said in a note to clients on Friday. “I'm here,” he said. “Although it is very early, the first set of first-quarter reports from banks highlights the risk that guidance will fall short of implied high growth expectations, even though the overall fundamental picture remains healthy. I have to.”
More banks, including Goldman Sachs, Bank of America and Morgan Stanley, are set to report their earnings early next week as investors continue to track how rising interest rates are impacting the financial services sector. expected to be announced.
It all depends on demand
As we enter the first week of quarterly updates for the first quarter, Wall Street strategists are focusing on how companies specifically are driving earnings growth.
Over the past year, many companies have used layoffs and other tactics to maintain profit growth while demand lags. Strategists are hopeful that that narrative may change this quarter as the market continues to rally and profit growth supports recent signs that the U.S. economy is accelerating.
Kevin Gordon, senior investment strategist at Charles Schwab & Co., told Yahoo Finance: “We're at a point in the cycle where we really need to start seeing that earnings growth translate into higher levels. If we don't, the problem will become even bigger.” . “Companies have aggressively reduced labor costs by cutting staff last year, but they can only do so for a limited time. Ultimately, they have to see real demand come back.”
S&P 500 sales are expected to rise 3.4% in the first quarter, below the 10-year average of 5.1%, according to FactSet data.
Wei Li, global chief investment strategist at BlackRock, said the recent weakness in markets stemmed from concerns that the downward trajectory of inflation has stalled and the Fed may cut interest rates less than expected. Given that, how this earnings season plays out will become increasingly “important” for the market's rally.
“Despite hawkish pricing, the market is at year-to-date levels, so earnings are helping,” Lee told Yahoo Finance. “So we will see whether earnings continue to support hawkish re-pricing, even though the earnings hurdle has also risen.”
Monday
economic data: Empire Manufacturing, April (-5 expected, -20.9 prior). March retail sales, month-over-month (forecast +0.4%, previous +0.6%). March retail sales (excluding automobiles and gasoline) compared to the previous month (forecast +0.3%, previous +0.3%). NAHB Housing Market Index, April (expected 51, previous 51)
revenue: Charles Schwab (SCHW), Goldman Sachs (GS)
Tuesday:
economic data: Number of building permits in March compared to the previous month (expected decrease of 0.3%, previous 2.4%). Monthly change in housing starts in March (forecast -2.7%, previous +10.7%). Industrial production, month-on-month, March (forecast +0.4%, previous +0.1%)
revenue: Bank of America (BAC), BNY Mellon (BK), Interactive Brokers Group (IBKR), JB Hunt (JBHT), Johnson & Johnson (JNJ), Morgan Stanley (MS), PNC ( PNC), United Airlines (UAL), United Health Group (UNH)
Wednesday
economic data: MBA home loan applications, week ending April 12 (previously up 0.1%)
revenue: 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 )
Thursday
economic data: Number of new unemployment insurance claims for the week ending April 13 (previously 211,000). Philadelphia Fed Business Outlook, April (forecast 0.0, previous 3.2). Leading index, March (forecast -0.1%, previous +0.1%). Existing home sales in March compared to the previous month (forecast -5.1%, previous 9.5%)
revenue: Netflix (NFLX), Alaska Airlines (ALK), Ally Financial (ALLY), Blackstone (BX), DR Horton (DHI), KeyBank (KEY), PPG (PPG), Trust (TFC), TSMC (TSM), Union Pacific (UNP), Western Alliance (WAL), WD-40 (WDFC)
Friday
economic data: No significant economic data.
Revenue: American Express (AXP), Procter & Gamble (PG)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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