Benzinga - by Neil Dennis, Benzinga Staff Writer.
Equity markets remain under pressure on Monday as investors await the start of fourth-quarter earnings season for guidance on whether the rally of November and December could be resumed in January.
Last week was the first down week for U.S. stocks following nine-consecutive weeks of gains for the S&P 500 index and for the SPDR S&P 500 ETF (NYSE:SPY), the exchange traded fund that mirrors the index’s moves. After gaining 16% in the most recent stage of a powerful 2023 rally, last week the index lost 1.6%.
Why Are Equity Markets Moving Lower In January?
- Some analysts believe that after a prolonged rally, stock valuations are at levels where profit taking looks attractive
- Markets have gotten ahead of themselves on Federal Reserve rate cut expectations, and the likely real pace of cuts are now fully priced in
- Geopolitical events, particularly in the Middle East, could yet push up oil prices and add to inflationary pressures
- Concerns over economic slowdown have become harder to ignore and investors are now awaiting signals from fourth-quarter earnings reports over whether the rally can be extended
The big bank earnings are seen as something of a bellwether for the overall earnings season, and it will be their outlooks for 2024 that could either give the green light for the rally to continue, or to keep the brakes on for longer.
“The upcoming earnings season has assumed added significance, given the robust rally that propelled the stock market to close 2023 on a high note,” said Andrew Prochnow at Seeking Alpha.
He added: “This surge has heightened expectations for Q4 earnings, as sustaining all-time highs in the stock market seems improbable if the forthcoming earnings reports fall short of optimistic projections.”
So What Is Expected In Q4?
But we’ve seen through the lens of purchasing manager surveys that activity is slowing, the labor market is starting to show signs of stress as firms become more cautious on hiring. In the manufacturing sectors, new orders are slowing and inventories of finished goods are growing.
Indeed, Zacks estimates fourth-quarter earnings growth for the S&P 500 companies to be up 0.1% from the same period last year. That’s down from the 3.4% growth seen in Q3 compared to a year earlier.
“It makes sense for growth to moderate going forward to reflect the cumulative effect of monetary policy tightening,” said Sheraz Mian, director of research at Zacks.
Outlook For 2024 Will Be Critical
Crucial to all sectors will be how the consumer reacts over the coming weeks and months. While evidence of a slowing labor market generally weighs on consumer sentiment, December’s survey by Michigan University revealed consumer confidence hit its highest level in five months.
This reflected expectations that inflation will continue to ease, and Federal Reserve interest rate cuts will soon follow in 2024.
“With almost 30% of households expecting interest rates to go down, it would make sense if consumers now start borrowing and spending at a faster pace,” said Torsten Slok, chief economist at Apollo Global Management.
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