Market Trends: Earnings Season and Economic Indicators Shape Investor Sentiment

Anticipation of Earnings Season

The stock market is wavering near all-time highs as traders eagerly await the start of the earnings season. Investors are keeping a close eye on the US presidential race and any indications regarding the Federal Reserve's next steps. If the S&P 500 finishes higher, it will mark its 35th record this year. According to a survey by the Fed Bank of New York, US consumers' near-term inflation expectations have fallen for a second consecutive month.

As some of the largest banks prepare to kick off the second-quarter reporting season on Friday, analysts' upgrades to profit estimates have outnumbered downgrades. Expectations for 12-month forward earnings are currently at an all-time high, reflecting a robust outlook.

Impact of Robust Earnings and Resilient Economy

John Stoltzfus of Oppenheimer Asset Management suggests that a robust earnings outlook and a resilient economy could support even higher valuations. Stoltzfus has raised his year-end target for the S&P 500 to 5,900, representing a 6% gain from the latest close.

Stoltzfus notes, "S&P 500 earnings results over the most-recent reporting seasons and economic data that has provided evidence of resilience remain at the core of our bullish outlook for stocks." Currently, the S&P 500 is hovering near 5,570.

Nvidia Corp. saw a rally as UBS Group AG raised its target, citing "exceedingly robust" demand. Meanwhile, Taiwan Semiconductor Manufacturing Co. briefly surpassed $1 trillion. Treasury 10-year yields remained steady at 4.29%.

Political and Economic Factors

The lack of a clear winner in the French elections is viewed with some relief, as speculation suggests there are unlikely to be major policy changes amid political gridlock. In the United States, President Joe Biden pledged to fellow Democrats that he will remain in the presidential race.

Morgan Stanley's Mike Wilson advises traders to brace for a correction in the stock market due to uncertainties surrounding corporate earnings, Fed policy, and the US presidential campaign. He predicts a "choppy" third quarter.

August is expected to kick off a challenging two-week stretch for US stocks, with money potentially pouring out of equities. Goldman Sachs Group Inc.'s Scott Rubner explains that corporate results' high expectations have already been priced in, meaning the earnings season is "no longer a tailwind for stocks."

Over the past two years, a small cohort of companies has contributed to the bulk of the S&P 500's return. According to data compiled by Bloomberg, the S&P 500 has gained roughly 55% since the lows of October 2022, but 58% of that advance has come from just the top 10 stocks in the benchmark.

Outlook for the S&P 500

Nicholas Colas of DataTrek believes S&P 500 earnings growth will likely continue at a respectable pace over the next year. He anticipates that these improvements will be broad-based rather than concentrated in a few tech-heavy sectors, supporting continued strength in US large caps.

The S&P 500 is currently in its 11th-longest stretch without a 2% down day since 1928, according to Ed Clissold at Ned Davis Research. Clissold notes, "The end of previous long streaks has been followed by mixed returns, but not the end of the bull market, on average."

This week, Jerome Powell will face pressure from lawmakers growing impatient for the Fed to cut rates and others unhappy with its latest plan to boost capital requirements for Wall Street lenders. Powell is scheduled to deliver his semiannual testimony to Capitol Hill on Tuesday and Wednesday.

Aside from Powell's testimony, the June consumer price index (CPI) data released on Thursday will be a highlight. The core CPI, which excludes food and energy costs, is expected to show the smallest back-to-back gains since August, a pace more palatable for Fed officials.

Krishna Guha at Evercore says, "While the CPI release will be key, we will be looking for signs from Powell that the Fed is edging closer to a decision to cash in its chips and move in September, provided ongoing inflation news broadly confirms that the run-rate has stepped back down."

Corporate Highlights and Predictions

Jason Pride and Michael Reynolds at Glenmede predict that if US inflation moderates without collateral damage to the economy, the resulting Fed easing cycle could be a tailwind for risk assets. They state, "Synchronized global easing cycles have historically been a bullish signal for equities in the short-to-medium term."

According to Glenmede, the S&P 500 has posted forward returns of 9.9% in the 12 months immediately following periods when 40-60% of global central banks eased policy. This number increases to 18.7% in the 80-100% tranche, suggesting that equities could benefit if more central banks hop on the easing bandwagon.

Strategists at Principal Asset Management indicate, "The Fed is closing in on rate cuts as the US economy moderates." They expect cuts in September and December, contingent on additional evidence of a slowdown.

Major Corporate Developments

Exxon Mobil Corp. anticipates a drop in refining profits due to lower industry margins, reducing earnings estimates for the second quarter.

Southwest Airlines Co., facing demands for leadership and business changes from activist Elliott Investment Management, has named aviation industry veteran Rakesh Gangwal to its board.

Eli Lilly & Co. has agreed to buy US gut-drug maker Morphic Holding Inc. for about $3.2 billion, investing proceeds from its obesity blockbuster Zepbound into its experimental pipeline.

Devon Energy Corp. has agreed to acquire the Williston Basin business of Grayson Mill Energy for $5 billion, continuing consolidation in the US oil sector.

Paramount Global has agreed to merge with Skydance Media, handing control of the Hollywood studio to producer David Ellison.

Lucid Group Inc. surpassed expectations for quarterly production and deliveries, boosting its shares amid concerns about a slowdown in the electric-vehicle market.

Key Events and Economic Indicators

Key events this week include:

• China aggregate financing, money supply, new yuan loans (Tuesday)
• Jerome Powell delivers the Federal Reserve's semi-annual testimony to the Senate Banking Committee (Tuesday)
• US Treasury Secretary Janet Yellen testifies to the House Financial Services Committee (Tuesday)
• Fed's Michael Barr and Michelle Bowman speak (Tuesday)
• China PPI, CPI (Wednesday)
• Jerome Powell testifies to the House Financial Services Committee (Wednesday)
• Fed's Austan Goolsbee, Michelle Bowman, and Lisa Cook speak (Wednesday)
• US CPI, initial jobless claims (Thursday)
• Fed's Raphael Bostic and Alberto Musalem speak (Thursday)
• China trade (Friday)
• University of Michigan consumer sentiment, US PPI (Friday)
• Citigroup, JPMorgan, and Wells Fargo report earnings (Friday)

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