U.S. stock futures were lower to start trading for the new week as investors awaited more earnings and an important speech from Federal Reserve Chairman Jerome Powell.
Investors were also taking some profits after the stock market’s hot start to the year. The S&P 500 is up more than 7% for 2023. The Nasdaq Composite is up the last five weeks in a row.
Dow Jones Industrial average futures lost 69 points, or 0.2%. S&P 500 futures were lower by 0.3% and Nasdaq-100 futures fell by 0.3%.
Karl Chalupa, CEO of Gamma Investment Consulting said earnings could worsen further as the economy slows later this year and noted that no recovery from a major bear market low has occurred in the last 60 years when stocks were not at least fairly valued.
“On average, new bull markets launched when stocks were 25% undervalued,” he said. “At current valuation, the S&P 500 would need to fall below 3,500 just to reach fair value; a decline to 25% undervaluation would see the S&P 500 fall near to its Covid-low of 2,200.”
Disney, Chipotle, Dupont and PepsiCo are among the major companies reporting earnings this week. We are about halfway through fourth-quarter earnings season for the S&P 500 and the results have not been great. Profits for S&P 500 companies are on pace to be 2.7% lower for the fourth quarter, according to Refinitiv. Tyson Foods and Cummins report on Monday, but the major reports pick up later in the week.
Markets will likely be on edge ahead of a speech by Federal Reserve Chairman Jerome Powell Tuesday before the Economic Club of Washington. Powell’s comments on disinflation caused investors to bid shares higher last week and overlook another rate hike out of the central bank. There is very little economic data due on Monday.
“While interest rates may be near their peak, it would take an actual sharp drop in rates combined with resurgent earnings growth for valuation to improve substantially without a further drop in stock prices,” Chalipa added.
Investors seem to be looking past rate hikes and poor earnings and focusing on recent data that is showing inflation trending lower in the hopes that the economy is headed for a soft landing and profits will be revived later in the year. The S&P 500 just formed a bullish “Golden Cross” pattern and touched a 5-month high last week above the 4,100 level. The Nasdaq’s 5-week winning streak is its first since November 2021.
