Corporate earnings season has begun on Wall Street.
Reports from some of the country’s largest financial institutions and crucial reading on inflation will welcome investors next week.
The Consumer Price Index (CPI) for December will be released on Thursday morning, with the Producer Price Index (PPI) for December due on Friday.
The week will conclude with a slew of bank earnings from JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC), BlackRock (BLK), and Citi (C) at the start of the Q4 earnings season.
Stocks enter the fourth-quarter reporting period in calm mode. After nine straight weeks of gains, the S&P 500 has produced a negative week to start 2024. Over the past five trading sessions, the tech-heavy Nasdaq (^IXIC) has fallen nearly 4%. The S&P 500 (^GSPC) was down nearly 2% while the Dow Jones Industrial Average (^DJI) was down nearly 1%.
The surprising December jobs report showed that the US labor market ended 2023 on a largely strong footing. The labor market added 216,000 jobs in December, about 40,000 more than the previous month and ahead of Wall Street estimates for the latest report. The unemployment rate stabilized at 3.7%, a historically low level.
Average hourly earnings, a closely watched indicator of inflation and a measure of how much influence workers have in the labor market, rose 0.4% on the month and 4.1% from a year ago. Economists had expected wages to rise by 0.3% compared to last month and 3.9% compared to last year.
“The strength in wages data is pushing the Fed to hold steady for longer,” Thomas Simons, a US economist at Jefferies, wrote in a note to clients on Friday. “(Average hourly earnings) have been running much faster than inflation over the past few months. The Fed is happy with the progress it has made in getting inflation down to 2%, but continued strength in (average hourly earnings) will make that a problem.” The last mile is more difficult to solve.”
As Simons nodded, the debate over when the Fed will cut interest rates remains. Goldman Sachs still expects the first cut in March.
“We continue to expect three consecutive 25 basis point cuts in the federal funds rate in March, May and June on the back of lower core inflation,” Goldman’s economic team led by Jan Hatzius wrote on Friday.
For now, market prices are on Goldman Sachs’s side, although the odds change. As of Friday afternoon, markets were pricing in a roughly 66% chance of a rate cut in March. A week ago, investors had placed a roughly 88% chance on a cut, according to the CME FedWatch tool.
Much of the debate over when the Fed will cut centers on how certain the central bank is that inflation is actually trending down toward the Fed’s 2% target.
More information on this will be available next week with the December CPI reading.
Wall Street economists expect headline inflation to rise by 3.2% annually in December, a slight increase from 3.1% in November. Prices are expected to rise by 0.2% on a monthly basis, which is also a slight increase from 0.1% in November.
On a “core” basis, which excludes food and energy prices, the CPI is expected to rise 3.8% from a year ago in December, a slowdown from the 4.0% increase seen in November. Monthly increases in base prices are expected to reach 0.3%.
“Overall, we look for next week’s CPI report to show that inflation continues to trend slower in a way that causes the FOMC to begin cutting interest rates in June,” Wells Fargo’s economic team wrote in a research note on Friday. “Energy prices were more stable last month and are unlikely to repeat the large declines seen in October and November. We expect commodity inflation to continue to decline amid normalizing demand, healthier supply chains, and lower commodity prices from their peaks.”
On the corporate front, the fourth quarter earnings season will start with strong results. Delta Air Lines (DAL), JPMorgan, Citi, Wells Fargo, Bank of America and BlackRock are all scheduled to report Friday morning.
Investors will be looking for updates on consumer spending as well as how the financial sector is holding up amid the rising rate environment. The prospect of an interest rate cut by the Federal Reserve in 2024 could be a boost for bank stocks, according to Wells Fargo analyst Mike Mayo, who covers financials.
“You saw with the Fed’s turnaround in December, bank stocks started to outperform,” Mayo told Yahoo Finance Live. “But when you see (the Fed cuts) actually happening, I think the banks will perform more. I think the downside risks will be mitigated.”
The financial sector will provide the first look at how companies will perform in the fourth quarter. Overall, Wall Street was increasingly pessimistic about fourth-quarter earnings. Since Sept. 30, S&P 500 earnings estimates have fallen 6.8%, according to FactSet. This represents the largest decline since the third quarter of 2022 and far exceeds the 20-year average of 3.8%.
Pinky Chadha, chief US equity strategist at Deutsche Bank, expects a more strong quarter for earnings. But in the near term, even that may not be a boost to the market, according to Chadha, who points out that the stock’s massive year-end rally puts stocks in a risky position.
“The magnitude of stock appreciation during earnings seasons has historically been largely tied to market performance and stock positioning,” Chadha explained in a note to clients. “Despite the strong growth and strong beats we expect this season, the market’s rally will likely be tempered by the strong rise in the S&P 500 since the end of the previous earnings season and the elevated (but not extreme) equity position.”
Weekly calendar
Monday
Economic data: There are no notable economic releases
Profits: Jeffries (Jeff)
Tuesday
Economic data: NFIB Small Business Optimism, December (90.6 expected, 90.6 previously)
Profits: WD-40 (WDFC), Tilray (TLRY)
Wednesday
Economic data: Wholesale Inventories MoM, November (-0.2% expected, -0.2% previously)
Profits: Knowledge Base Page (KBH)
Thursday
Economic data: Initial jobless claims, week ending January 6 (211,000 expected, 202,000 previously); CPI, Monthly, December (+0.2% expected, +0.1% previously); CPI excluding food and energy, monthly, December (+0.3% expected, +0.3% previously); CPI, YoY, December (+3.2% expected, +3.1% previously); CPI excluding food and energy, y/y, December (+3.8% expected, +4% previously); Real average hourly earnings, y/y, December (+0.8% previously); Average real weekly earnings, year-on-year, December (+0.5% previously)
Profits: There are no noticeable profits
Friday
Economic data: Producer Price Index, Monthly, December (+0.2% expected, 0% previously); Producer Price Index, YoY, December (+1.3% expected; +0.9% previously); Core Producer Price Index, Monthly, December (+0.2% expected, 0% previously); Core PPI, y/y, December (+2% expected; +2% previously)
Profits: Delta Air Lines (DAL), JPMorgan (JPM), Citigroup (C), BlackRock (BLK), Bank of America (BAC), Bank of New York Mellon (BK), Wells Fargo (WFC), UnitedHealth ( UNH)
Josh Schaeffer is a reporter for Yahoo Finance.
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