Retail sales and investment banks: What to watch this week

After snapping a nine-week streak to start 2024, stocks got back to their winning ways last week. All three major indexes advanced during the first full trading week of the year, led by a 3% gain for the Nasdaq Composite (^IXIC), while the S&P 500 (^GSPC) finished the week’s trading less than 13 points, or about 0.3%, away from a record high. To cap the week, Microsoft (MSFT) also overtook Apple (AAPL) as the world’s most valuable company. In the week ahead, investors will look to keep the momentum going in a holiday-shortened week. With US markets closed Monday in observation of Martin Luther King Jr. Day, results from the financial sector and Wednesday’s retail sales data should serve as the main calendar catalysts. Retail sales are expected to rise 0.4% in December, an increase from the 0.3% gain in November, as US consumers continue to power a surprisingly durable economic expansion. Michael Gapen, an economist at Bank of America, wrote that the firm expects the government to apply seasonal adjustments to December’s data that will lead to a “robust” retail sales number. “Stepping back,” Gapen added, “we think spending is healthy but not surging.” Right now, the firm sees fourth quarter GDP tracking toward an annualized growth rate of 1.2%. Elsewhere on the economic calendar, Thursday’s initial jobless claims data and a look at consumer sentiment from the University of Michigan out Friday will warrant a close look from investors. Away from the earnings and economic calendar, Monday’s Iowa caucuses will mark the official start of the 2024 US presidential election. On the geopolitical front, rising tensions in the Red Sea — with the US and its allies carrying out airstrikes on consecutive days in Yemen last week — are garnering increased attention from investors. The coming week’s key earnings reports are expected Tuesday morning, with investment banks Goldman Sachs (GS) and Morgan Stanley (MS) set to offer results after a challenging year for the dealmaking business that features in their results. Ken Leon, research director at CFRA, told Yahoo Finance Live on Friday, “I think the investment banking story [next week] will be, again, that we hit the trough of the cycle last year.” On Friday, major money center banks including JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC), and Citi (C) all reported fourth quarter and annual results, with JPMorgan’s nearly $50 billion record annual profit and Citi’s plans to cut 20,000 jobs and another $2.5 billion in costs serving as highlights. Friday’s earnings season kickoff also featured results from Delta Air Lines (DAL), which disappointed investors and sent shares of the airline down nearly 9% and dragged peers United Airlines (UAL) and American Airlines (AAL) lower.

Mixed signals on inflation

Inflation data last week showed consumer prices were firmer than forecast in December, while producer prices moderated more than expected. In a client note on Friday, Nancy Vanden Houten, lead US economist at Oxford Economics, flagged Red Sea-related disruptions as presenting an “upside risk” to the firm’s inflation forecasts. With investors focused on how each incremental piece of inflation data could alter the Federal Reserve’s plans to cut interest rates this year, this past week’s data offered a marginal increase in conviction this process will begin in March. Data from the CME Group shows investors pricing in a 77% chance the Fed cuts rate by 0.25% in March, up from a 65% chance reflected last week following a strong December jobs report. “We have adjusted our baseline assumptions to assume that the FOMC will initiate every-other-meeting incremental cuts starting in March, two meetings earlier than before,” wrote Barclays economists led by Jonathan Millar on Friday. He added: “This mainly reflects our downward revisions to core PCE price inflation, which significantly boost the likelihood that the FOMC will continue to see relatively soft monthly prints from this measure through February. Nonetheless, we regard March’s outcome as a much closer call than the ~80% likelihood being priced by markets.” Barclays also sees rates proceeding at a “much more gradual” pace than markets are pricing in — Millar and team see rates falling 1% by the end of 2024, with markets expecting closer to 1.5% worth of rate cuts. The current fed funds rate stands in a range of 5.25%-5.50%.

Earnings themes to watch

The financial sector has taken the spotlight to begin earnings season. But the big story for markets in 2023 focused on tech stocks and, in particular, the “Magnificent Seven” megacap leaders that powered the Nasdaq to a gain north of 40%. Later this month, results from these names and other tech stalwarts will start to trickle in. And how this sector performs will be of particular interest to investors as valuations for the Technology (XLK) sector have surged in anticipation of an AI-driven profit cycle. At the end of 2023, data from Bank of America showed the Technology sector’s forward P/E ratio stood at 27, the second highest among all S&P 500 sectors — only Real Estate (XLRE), which saw valuations rise as earnings for the sector fell sharply, traded at a higher valuation (39). The S&P 500 as a whole traded at 19.8 times next year’s expected earnings. With Technology accounting for more than 28% of the S&P 500’s market cap, these results will exert an outsized influence on the index’s overall direction. In a note published Friday, John Butters at FactSet highlighted negative guidance offered by S&P 500 companies for fourth quarter results stood slightly above the recent five- and 10-year averages, with 111 members of the index cautioning the Street about forthcoming results. When looking at these warnings by sector, Technology is a standout. FactSet’s data shows 25 members of the tech sector cautioned that earnings would miss forecasts in the fourth quarter, more than the 10-year average of 19 members of sector issuing a similar warning. Overall, there are 64 S&P 500 members in the sector. Now, when it comes to the Magnificent Seven names in particular, sector-level nuance becomes a challenge — Meta Platforms (META) and Alphabet (GOOG, GOOGL) are components in the Communication Services (XLC) sector, while Amazon (AMZN) and Tesla (TSLA) are classified as Consumer Discretionary (XLY) names. But all of these stocks are components in the Nasdaq, the market’s bellwether for investor sentiment. And with the “tech trade” taking on a monolithic role in the mind of many investors last year, the party won’t really get started for fourth quarter earnings season until reports from these names start rolling in.