A view of the JPMorgan Chase headquarters in New York City, captured on May 26, 2023. (Michael M. Santiago/Getty Images)
Investors are set to face a significant week with a key inflation reading and the start of second-quarter earnings reports. Last week ended on a high note with stocks closing near record levels, but the upcoming events could bring some changes.
Key Inflation Data Release
One of the most anticipated events this week is the release of June's Consumer Price Index (CPI) on Thursday. Investors are particularly interested in this data because it could influence the Federal Reserve's decision on interest rates. Recently, job growth has slowed, making a case for the Federal Reserve to possibly cut rates in September. Additionally, Federal Reserve Chair Jerome Powell will testify before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday, which will be closely watched by investors for any hints on future policy moves.
Corporate Earnings Reports
On the corporate front, the earnings season kicks off on Friday morning with some of America's largest financial institutions reporting their second-quarter results. JPMorgan, Wells Fargo, and Citi are among the key players releasing their earnings. Earlier in the week, PepsiCo and Delta Air Lines will also be in the spotlight.
Stock Market Performance
Last week, the S&P 500 rose nearly 2%, and the Nasdaq Composite surged over 3%, both reaching record highs. The Dow Jones Industrial Average, which has lagged most of the year, saw a modest gain of 0.5%.
The case for a September Rate Cut
The June jobs report indicated that the U.S. economy added more jobs than expected. However, the details showed signs of a slowing labour market. The unemployment rate rose to 4.1%, the highest since November 2021, and job gains for April and May were revised down by 111,000. Many economists believe this data supports the case for the Federal Reserve to cut interest rates in September.
Nancy Vanden Houten, lead US economist at Oxford Economics, mentioned that the June jobs report showed signs of cooling in the labour market, with job growth and earnings growth slowing, and the unemployment rate rising. She added that the June data supports the forecast for the Fed to cut rates in September. Neil Dutta from Renaissance Macro also noted that the report strengthens the expectation of a rate cut in September.
As of Friday, there was a roughly 75% chance that the Fed would cut rates by its September meeting, up from 64% the previous week, according to the CME's FedWatch Tool. Investors will closely listen to Powell’s testimony this week for any policy hints ahead of the Fed's July 30-31 meeting.
Inflation as a Key Factor
Inflation remains a critical factor in the rate cut decision. In May, prices increased at their slowest pace of 2024. Powell commented that the data suggested a return to a disinflationary path. The June CPI report, due on Thursday, will test if this trend continues. Economists expect headline inflation to rise just 3.1% annually in June, a slowdown from May's 3.3% rise.
Big Banks Set the Stage
Earnings season focuses on the financial sector, with 40% of the S&P 500 companies reporting in the next few weeks being from this sector. However, regional banks are expected to report a 26% decline in earnings growth year-over-year. Analysts forecast the financial sector to grow earnings by 4.3% year-over-year in Q2, ranking it seventh among the eleven S&P 500 sectors.
High Bar for Q2 Earnings
After recovering from an earnings recession in 2023, companies now face high expectations this reporting season. The S&P 500's earnings are expected to grow 8.8% year-over-year in the second quarter, the highest since Q1 2022. Goldman Sachs' chief US equity strategist, David Kostin, noted that the high bar set by consensus forecasts means the magnitude of earnings beats may diminish compared to previous quarters.
Citi’s US equity strategist, Scott Chronert, echoed this sentiment, suggesting that large stock increases are unlikely this quarter due to high growth expectations. Deutsche Bank's Binky Chadha mentioned that while the S&P 500 typically rises during earnings season, the recent market run-up and heavy equity positioning suggest a muted rally.
Weekly Calendar
Monday: No notable earnings releases.
Tuesday: Fed Chair Powell testifies before the Senate Banking Committee; Helen of Troy releases earnings.
Wednesday: Fed Chair Powell testifies before the House Financial Services Committee; Manchester United, WD-40, and PriceSmart release earnings.
Thursday: June CPI report; earnings from Conagra Brands, Delta Air Lines, PepsiCo, and Progressive.
Friday: Earnings from BNY Mellon, JPMorgan, Citigroup, and Wells Fargo.
