Inside Markets — Earnings Season

This week’s ramp in CQ4 earnings season will be a test for the momentum-driven rally. The SPX needs some big earnings updates to advance from current levels. While it’s still very early, companies that beat a low Q4 bar have generated ~1% downside on average thus far. Equity positioning is above average, bullish sentiment is elevated and valuation multiples have rerated with the SPX trading at 19.9x consensus ’24 EPS. Note, the equal-weight S&P 500 (SPW) trades at a more-reasonable 14.8x forward EPS.

The cyclically-sensitive Russell 2000 (RTY) is higher for a third-straight session but remains well-below its own range resistance level near 2040. Upside in the RTY would follow the emergence of a cyclical-recovery narrative, which seems unlikely given late-cycle dynamics and extremely restrictive real yields.

Real yields will likely decline from current levels but remain at highly restrictive levels unless something breaks. The current backup in nominal yields looks like it will run out of steam near 4.25% as markets price for Fed policy normalization to begin in June. Historically, the downside in bond yields from policy normalization is relatively disappointing as opposed to the downside generated by a growth scare. Also note that yields tend to decline leading into the start of policy normalization with limited downside following the first rate cut.