Is the current stock market rally sustainable?

Wall Street insiders continue to debate conflicting economic data and a possible earnings recession ahead. Data and earnings so far actually offer convincing evidence to support both sides of the arguments which is making it tough for either the bulls or the bears to gain an upper hand.

Central banks 

Bulls believe an end or a pause in the US Federal Reserve's interest rate hiking campaign would greatly reduce - if not eliminate - the risks of both an economic and earnings recession. The Bank of Canada yesterday offered some new hope that such a move could be around the corner as it became the first major central bank to say it will hold off on hiking rates any further.

The BOC made the move despite inflation still holding above +6%, more than three times its target rate of +2%. The bank noted, "We are still a long way from our target, but recent developments have reinforced our confidence that inflation is coming down." The BOC also made it clear that this was just a pause "to give us time to assess whether we've raised interest rates enough." The US and Canadian economies are both in similar boats right now so bulls see a case for the US Fed to follow the CoB's lead.

Economy 

Three upcoming US economic reports could have a big impact on what investors expect from future Fed policy moves.

The first is the initial estimate of Q4 Gross Domestic Product (GDP), which is due out today. Economists expect the annual growth rate fell to +2.7% from +3.2% in Q3. A moderate slowdown here would match what the Fed is trying to accomplish. If growth slides much further than expected or worse, turns negative, it will likely fan the recession fear flames.

Bulls will see any major growth pullback as justification for the Fed to end rate hikes in the near-term and possibly start cutting rates by the end of the year if growth continues to crater.

Data to watch

After GDP today, the PCE Prices Index on Friday is the next major test for the Fed's inflation fighting policies, followed by the Employment Cost Index next Tuesday, January 31. Next Tuesday also marks the start of the Fed's two-day policy meeting, with its rate hike decision due on February 1.

Other data today includes New Home Sales and Durable Goods Orders, as well as advance reads on International Trade, and Retail and Wholesale Inventories.

On the earnings front, results so far for Q4 have not been as bad as expected. However, many of the big names reporting this week have offered very disappointing forward guidance which is only adding to existing fears about an economic downturn.

Earnings results are due today from Blackstone Group, Comcast, Dow, Intel, Mastercard, Northrop Grumman, Nucor, Sherwin Williams, Valero Energy, and Visa.