Corporate earnings season on Wall Street is starting again.
Reports from some of the country's largest financial institutions and a key inflation rate will greet investors in the coming week.
The consumer price index (CPI) for December will be published on Thursday morning and the producer price index (PPI) for December will be published on Friday.
The week ends with a series of banking results from JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC), BlackRock (BLK) and Citi (C), kicking off the fourth quarter earnings season.
Stocks enter the fourth quarter reporting period in decline mode. After nine straight weeks of gains, the S&P 500 had a negative week to start 2024. Over the past five trading sessions, the tech-heavy Nasdaq (^IXIC) has lost nearly 4%. The benchmark S&P 500 (^GSPC) fell nearly 2%, while the Dow Jones Industrial Average (^DJI) slipped nearly 1%.
A surprise jobs report in December showed the U.S. job market ended 2023 largely on solid footing. The labor market added 216,000 jobs in December, about 40,000 more than the previous month and above Wall Street estimates for the latest report. The unemployment rate remained constant at 3.7%, a historically low level.
Average hourly wages, a closely watched indicator of inflation and a measure of how much influence workers have in the labor market, rose 0.4% on a monthly basis and 4.1% over the last year; Economists had expected wages to rise 0.3% from the previous month and 3.9% from a year ago.
“The strength of the payroll data suggests that the Fed will remain on hold for a while,” Jefferies U.S. economist Thomas Simons wrote in a note to clients on Friday. “[Average hourly earnings are] Inflation has run significantly faster than inflation in recent months. The Fed is pleased with the progress it has made in bringing inflation down to 2%, but continued strength remains [average hourly earnings] will make it even more difficult to solve the last mile problem.”
The story goes on
While Simons nodded, the debate over when the Federal Reserve will cut interest rates continues to simmer. Goldman Sachs still expects the first cut to occur in March.
“We continue to expect three consecutive 25 basis point Fed rate cuts in March, May and June due to lower core inflation,” Goldman's economic team led by Jan Hatzius wrote on Friday.
Currently, market pricing is on Goldman's side, although the odds are changing. As of Friday afternoon, markets were expecting a roughly 66 percent chance of a rate cut in March. A week ago, investors had a nearly 88% chance of a cut, according to the CME FedWatch tool.
Much of the debate over when the Fed will cut interest rates revolves around how confident the central bank can be that inflation will actually fall to the Fed's 2 percent target.
Further information will be provided next week with the December CPI data sheet.
Wall Street economists expect headline inflation to rise 3.2% annually in December, up slightly from 3.1% in November. Prices are expected to rise 0.2% month-on-month, also up slightly from November's 0.1%.
On a “core” basis, i.e. excluding food and energy prices, the CPI is expected to rise 3.8% year-on-year in December, slowing from the 4.0% rise in November. Monthly core price increases are expected to be 0.3%.
“All in all, we expect next week's CPI report to show that inflation continues to slow on trend, allowing the FOMC to begin cutting rates in June,” Wells Fargo's economic team wrote in Friday a research note. “Energy prices were more stable last month and are unlikely to repeat the sharp declines of October and November. We expect disinflation in core goods to continue due to normalization of demand, healthier supply chains and decline in commodity prices from their peak.”
On the corporate side, fourth quarter earnings season will begin with strong headlines. Delta Air Lines (DAL), JPMorgan, Citi, Wells Fargo, Bank of America and BlackRock will all report on Friday morning.
Investors will be watching for updates on consumer spending as well as how financials are faring amid the higher interest rate environment. The prospect of Fed rate cuts in 2024 could give bank stocks a boost, according to Mike Mayo, an analyst at Wells Fargo who covers financials.
“You saw bank stocks outperform with the Fed's reversal in December,” Mayo told Yahoo Finance Live. “But when you actually see it [the Fed rate cuts] If that happens, I think the banks will do even more. And I think the downside risk is mitigated.”
The financial sector will provide a first insight into how companies are performing in the fourth quarter. Broadly speaking, Wall Street is increasingly pessimistic about fourth-quarter results. Estimates for S&P 500 earnings have fallen 6.8% since Sept. 30, according to FactSet. This is the largest decline since the third quarter of 2022 and is well above the 20-year average of 3.8%.
Deutsche Bank's chief U.S. equity strategist, Binky Chadha, expects a more robust quarter for earnings. But in the short term, even that might not mean a boost for the market, says Chadha, who notes that the massive year-end stock rally is putting stocks in a precarious position.
“The magnitude of equity rally during earnings season has historically been largely dependent on market performance and equity positioning,” Chadha said in a note to clients. “Despite the robust growth and strong gains we expect this season, the market recovery will likely be tempered by the S&P 500's solid rise since the end of the previous earnings season and elevated (but not extreme) equity positioning.”
Marquee at the main entrance to JPMorgan Chase's headquarters building in Manhattan. (Photo by Erik McGregor/LightRocket via Getty Images) (Erik McGregor via Getty Images)
Weekly calendar
Monday
Economic data: No notable economic publications
Merits: Jefferies (JEF)
Tuesday
Economic data: NFIB Small Business Optimism, December (90.6 expected, 90.6 predicted)
Merits: WD-40 (WDFC), Tilray (TLRY)
Wednesday
Economic data: Wholesale inventories month-on-month, November (-0.2% expected, -0.2% previous)
Merits: KB Home (KBH)
Thursday
Economic data: Initial jobless claims, week ending Jan. 6 (211,000 expected, 202,000 prior); Consumer Price Index, month-on-month comparison, December (+0.2% expected, +0.1% previous); CPI excluding food and energy, month-on-month, December (+0.3% expected, +0.3% previous); Consumer Price Index, year-on-year, December (+3.2% expected, +3.1% previous); CPI excluding food and energy, year-on-year, December (+3.8% expected, +4% previous); Real average hourly earnings, year-on-year, December (+0.8% previously); Real average weekly earnings, year-on-year comparison, December (+0.5% previously)
Merits: No significant income
Friday
Economic data: Producer price index, monthly comparison, December (+0.2% expected, 0% previous); PPI, YoY, December (+1.3% expected; +0.9% so far); Core PPI MoM, December (+0.2% expected, previously 0%); Core PPI, YoY, December (+2% expected; +2% so far)
Merits: Delta Air Lines (DAL) JPMorgan (JPM), Citigroup (C), BlackRock (BLK), Bank of America (BAC), BNY Mellon (BK), Wells Fargo (WFC), UnitedHealth (UNH)
Josh Schafer is a reporter for Yahoo Finance.
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