The stock market kicked off the week on a cautious note, with traders sifting through remarks from a slew of Federal Reserve speakers while awaiting inflation data and the start of the earnings season.
(Bloomberg) — The stock market kicked off the week on a cautious note, with traders sifting through remarks from a slew of Federal Reserve speakers while awaiting inflation data and the start of the earnings season.
Following a three-day slide in the S&P 500, the benchmark fluctuated near 4,400. The market didn’t get much support from the megacap space as Tesla Inc. fell about 2% and Amazon.com Inc. dropped before its Prime Day event. The Nasdaq 100, which recently notched its best-ever first half of a year, will go through a “special rebalance” effective on July 24. A gauge of big banks rose despite news on a plan to boost capital requirements.
In the run-up to Wednesday’s consumer price index, the market got the latest thinking from a raft of policymakers. Three Fed officials — Michael Barr, Mary Daly and Loretta Mester — said the central bank will need to raise interest rates further this year to bring inflation back to its 2% goal. Meantime, Fed Bank of Atlanta President Raphael Bostic said officials can be patient for now amid evidence of an economic slowdown.
Market momentum has slowed since equities notched a strong first-half rally as concern resurfaced about the impact of the many economic crosscurrents on corporate profits. Morgan Stanley’s Michael Wilson became the latest to warn that earnings forecasts will matter more than usual this time around given elevated equity valuations, higher interest rates and dwindling liquidity.
“Many risks still lie ahead,” said Seema Shah, chief global strategist at Principal Asset Management. “With broad equity valuations having once again become stretched and market breadth extremely narrow, the market is priced for perfection, leaving it vulnerable to earnings disappointments.”
‘Just OK’
The earnings season kicks off in earnest on Friday, when JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. report. There’s more pain on the way for the S&P 500 as profit warnings and fears of higher interest rates combine to threaten the key US stock indicator, according to the latest Markets Live Pulse survey.
While earnings seasons have usually been positive for equities in the past decade, according to Deutsche Bank AG strategists, the upcoming one will hurt stocks, said 55% of the 346 MLIV respondents.
To Matt Maley at Miller Tabak + Co., it’s going to be harder for the market to rally if the earnings season is “not as bad as we thought,” especially since the market has become so expensive.
This does not mean that if the guidance from companies is “just OK,” the market will sell off meaningfully, Maley added. However, if corporate outlooks show any material disappointment, “it should create some serious headwinds for the stock market.”
Cutting Estimates
The big question is whether earnings can continue to bend without markets breaking, according to Saira Malik at Nuveen. With analysts cutting earnings estimates in recent weeks, companies may once again find it easier to deliver stronger-than-expected results.
“We are cautious about the self-fulfilling optimism driven by these diminished expectations,” Malik noted. “Additionally, we’re mindful of mixed US economic data and the potential for two more rate hikes this year.”
In other corporate news, a gauge of US-listed Chinese shares climbed on news the Asian nation will extend policies to support cash-strapped developers and shore up the ailing real estate sector. Icahn Enterprises LP soared as Carl Icahn renegotiated loan terms with a group of banks just months after a report by short seller Hindenburg Research sent shares in his investment firm tanking.
Key events this week:
- St. Louis Fed President James Bullard speaks, Tuesday.
- Canada rate decision, Wednesday.
- Bank of England Governor Andrew Bailey speaks, Wednesday.
- US CPI, Wednesday.
- Federal Reserve issues Beige Book, Wednesday.
- Fed speakers include Neel Kashkari, Loretta Mester, Raphael Bostic, Wednesday.
- China trade, Thursday.
- Eurozone industrial production, Thursday.
- US initial jobless claims, PPI, Thursday.
- US University of Michigan consumer sentiment, Friday.
- US banks kick off earnings, Friday.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.1% as of 2:18 p.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average rose 0.5%
- The MSCI World index rose 0.2%
Currencies
- The Bloomberg Dollar Spot Index fell 0.2%
- The euro rose 0.2% to $1.0994
- The British pound was little changed at $1.2849
- The Japanese yen rose 0.6% to 141.36 per dollar
Cryptocurrencies
- Bitcoin rose 0.3% to $30,297.16
- Ether was little changed at $1,870.23
Bonds
- The yield on 10-year Treasuries declined seven basis points to 3.99%
- Germany’s 10-year yield was little changed at 2.64%
- Britain’s 10-year yield declined one basis point to 4.64%
Commodities
- West Texas Intermediate crude fell 1.3% to $72.90 a barrel
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Brett Miller, Tassia Sipahutar, Robert Brand, Vildana Hajric, Isabelle Lee, Peyton Forte and Carly Wanna.
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