Stock markets fell last week as fears that persistent inflation could 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) slipped more than 1.6%. The Dow Jones Industrial Average (^DJI) fell nearly 2.5%, driven by a slump in bank stocks on Friday as quarterly earnings reports failed to impress investors.
Investors will welcome further updates on the state of corporate America in the coming week. Results from Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) round out the major banks’ results, while reports from United Airlines (UAL) and Netflix (NFLX) also light up the week.
In economic news, an update on March retail sales is scheduled for Monday, in what is expected to be an otherwise quiet week in economic data.
Hopes for interest rate cuts are fading
Last week we noted that employment data continued to be stronger than expected and more economists were questioning whether the Federal Reserve would cut interest rates in June. After another week of inflation data that showed price increases are not slowing as quickly as many had hoped, many economists now expect the Fed to keep interest rates stable at least through the fall.
The economic teams at Bank of America and Deutsche Bank, which had previously seen easing starting in early summer, now expect the Fed to cut rates for the first time in December, meaning there will only be one overall cut for 2024 becomes.
“We no longer believe policymakers will gain the confidence they need to begin austerity measures in June,” Bank of America U.S. economist Michael Gapen wrote in a research note on Thursday. “We expect inflation to remain relatively stable in the near term. We forecast 0.25% month-on-month for core PCE in March and April. This means that a reduction as early as June or September is unlikely unless there are clear signs of a deterioration in the labor market.”
Consensus now expects two rate cuts this year, according to Bloomberg data. And Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, pointed out that even this more dovish outlook may not come to fruition in 2024.
“Further disappointing inflation data or an election result that offers fiscal stimulus and/or policies that could boost inflation (e.g. trade or immigration policies) would argue for not cutting rates this year and through 2025,” Luzzetti wrote .
consumer testimonial
With consensus now that the Fed will keep raising interest rates for longer, economists will continue to watch closely for signs that U.S. consumer resilience is weakening.
A new reading of this trend awaits investors on Monday with the March retail sales report. Economists expect retail sales rose 0.4% in March from the previous month. This would extend February’s rebound after retail sales fell 1.1% in January.
“We do not believe consumer spending will slow significantly, particularly as wage growth remains solid,” Wells Fargo’s economic team wrote in a note to clients. “Real-time credit card spending data shows consumer spending in March remains above pre-pandemic trends.”
Bank profits show forecast risk
Early earnings from some of America’s largest financial institutions failed to impress investors. JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C) all reported declining net interest income in their quarterly reports.
JPMorgan maintained its forecast for net interest income of $90 billion in 2024, but analysts had expected the forecast to rise by $2 billion to $3 billion, according to CNBC.
“Markets have priced in a higher probability of the Goldilocks scenario playing out this year, bringing with it greater downside risk of ‘good but not good enough’ news,” Scott Chronert, U.S. equity strategist at Citi, wrote on Friday in a note to customers. “Although it is still very early, the banks’ initial 1Q reports highlight the risk that the forecast will fall short of high implied growth expectations, even if 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 monitor how higher interest rates will impact the financial services sector.
It’s all about demand
Heading into the first full week of quarterly updates for the first quarter, Wall Street strategists have been keeping an eye on exactly how companies are driving earnings growth.
Last year, many companies used layoffs and other tactics to maintain margin growth while demand lagged. Strategists expect that narrative to change this quarter as the market recovery continues and earnings growth supports recent signs of an accelerating U.S. economy.
“You’re kind of at the point in the cycle where you really need to see higher revenue growth, and if you don’t, that becomes a bigger problem,” Kevin Gordon, senior investment strategist at Charles Schwab, told Yahoo Finance . “Companies that have aggressively reduced labor costs through layoffs over the last year can only do so for so long. At some point you have to see that actual demand comes back into play.”
According to FactSet data, S&P 500 sales are expected to rise 3.4% in the first quarter, below the 10-year average of 5.1%.
Given the market’s recent slump on fears that the downward trend in inflation may have stalled and the Fed could cut interest rates less than expected, the trajectory of this earnings season will be increasingly “crucial” to the market recovery, Wei Li said globally Chief Investment Strategist at BlackRock.
“The gains have helped because markets are up year-to-date despite the restrictive pricing adjustment,” Li told Yahoo Finance. “So we will see if earnings continue to help rescue restrictive price adjustments, even as the earnings bar has also risen.”
Monday
Economic data: Empire Manufacturing, April (-5 expected, -20.9 previous); Retail sales month-on-month, March (+0.4% expected, +0.6% previous); Retail sales excluding auto and gasoline month-on-month, March (+0.3% expected, +0.3% prior); NAHB Housing Market Index, April (51 expected, 51 prior)
Merits: Charles Schwab (SCHW), Goldman Sachs (GS)
Tuesday:
Economic data: Building permits month-on-month, March (-0.3% expected, 2.4% previous); Construction starts month-on-month, March (-2.7% expected, +10.7% previous); Industrial production month-on-month, March (+0.4% expected, +0.1% previous)
Merits: 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 Mortgage Applications, Week Ending April 12 (+0.1% Previous)
Merits: 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: Initial jobless claims, week ending April 13 (previously 211,000); Philadelphia Fed April Business Outlook (0.0 expected, previously 3.2); Leading index, March (-0.1% expected, +0.1% so far); Existing Home Sales MoM, March (-5.1% Expected, 9.5% Previous)
Merits: Netflix (NFLX), Alaska Airlines (ALK), Ally Financial (ALLY), Blackstone (BX), DR Horton (DHI), KeyBank (KEY), PPG (PPG), Truist (TFC), TSMC (TSM), Union Pacific (UNP), Western Alliance (WAL), WD-40 (WDFC)
Friday
Economic data: No significant economic data.
Merits: American Express (AXP), Procter & Gamble (PG)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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