What drives markets now? Earnings, debt, risk of inflation
|Stocks continue to consolidate after the recent rebound, as Wall Street continues to debate the outlook for Q4 earnings season and future Fed moves. According to the latest data from FactSet, insiders expect the S&P 500 to report a year-over-year decline in Q4 earnings of -3.9%, which if realized would be the first quarterly loss since Q3 2020.
Banks earnings
Goldman Sachs and Morgan Stanley capped off big bank earnings yesterday with both taking a hit in their investment banking operations, similar to other Wall Street firms that reported last Friday. Goldman, which reported a whopping -69% decline in profits, was further pressured from the roughly $1 billion that the bank set aside in loan-loss provisions and a nearly $2 billion loss in its consumer banking division.
Morgan Stanley saw a similar plunge in investment-banking revenues but did manage to deliver a smaller profit decline (-40%) than analysts had been expecting thanks to a record quarter for its trading desk. While some banks in Q4 fared better than others, bears overall see signs of trouble in the additional +$3 billion that Wall Street banks collectively set aside to cover loans that might go bad amid a potential US recession in 2023.
Bulls vs bears
Bears believe the economy and corporate profits are at risk from both recession and elevated inflation in 2023 and warn that Wall Street is still underestimating the damage such a double-whammy will inflict.
Bulls continue to point to growing signs of decelerating price gains and slower job growth that they believe will pull inflation back toward the Fed's target rate faster than stock bears anticipate. Bulls however are still struggling to justify higher stock prices in the short-term as the Fed's tightening program and elevated inflation look set to continue against a backdrop of weaker consumer and business spending.
Investors are also now facing the possibility of a prolonged fight in Washington over the debt ceiling. Treasury Secretary Janet Yellen warned last week that the agency will begin taking “extraordinary measures” after the US reaches its $31.4 trillion debt limit on Thursday. Yellen warned Congress that the debt ceiling will need to be lifted by early June when the Treasury expects to exhaust its cash and the extraordinary measures, though experts say the government can likely make it to August before any type of shutdown. So it's not an immediate crisis but as the deadline approaches, investors will likely start to grow more nervous and see it as yet another unwelcome risk.
In conclusion
Today, investors will be digesting a slew of economic data, including the Producer Price Index, Retail Sales, Industrial Production, Business, the NAHB Housing Market Index, and the Fed's Beige Book. On the earnings front, Alcoa, Charles Schwab, Discover, JB Hunt, Kinder Morgan.
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