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Inside Markets — Earnings


January 29, 2024

The SPX has held up well due in large part to the outperformance of large cap Tech, which will be tested this week with earnings from five of the ‘Magnificent 7’ plus AMD. These companies will likely need to deliver upside to street estimates if the SPX is going to drift higher.  We see an unfavorable risk/reward setup with an aggregate earnings beat driving upside of ~2%, while a miss would likely result in a ~5-7% pullback to the 4550-4650 range. This week also includes a number of bellwether stocks for their respective industries including MET, XOM, SBUX, MRK, ABBV, CI, TMO, HCA, BA, UPS, GM and DHR among others.

We expect earnings will be the main driver behind this week’s price action with Wednesday’s FOMC meeting as a relative non-event.  The Fed is expected to switch to a neutral policy stance and may elect to add some hawkish language to the forward guidance to balance things out. The Fed is also expected to discuss a timeline to exit QT with an outline communicated in the meeting minutes due mid-February. The plan to exit QT will likely be made at the March meeting with implementation to begin in April.

While this week’s Fed meeting is expected to be a relative non-event, rate expectations will likely take on greater importance in the month ahead. Market-based probability for a March rate cut has fallen from ~75% at the start of the year to ~46% today.  As expected, last week’s release of December core PCE put the annualized six-month rate at +1.9% and the annualized three-month rate at +1.5%, both below the Fed’s 2% target. Core PCE is the Fed’s favorite inflation gauge, but that doesn’t mean they ignore CPI, which is running at a faster pace. Still-elevated core CPI inflation will likely keep the Fed on hold unless there is significant deceleration in near-term growth data. Regional January Fed surveys have pointed to a rapid deceleration in manufacturing activity, but that will need to show up in the hard data over the next two weeks to fit the March rate cut scenario. We see a greater likelihood for the first cut to happen in June, which would be disappointing from an equity market perspective. Equity markets have a history of ‘looking across the valley’ to an eventual recovery, but only when the valley is perceived as short and shallow.

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