Stock Market: Another Eventful Week Ahead

This week’s earnings schedule overall is the busiest so far of the Q2 2023 season with 170 S&P 500 companies reporting. A little over half have already reported.

Earnings

Earnings expectations have actually improved over the last week with growth for S&P 500 companies estimated to fall -6.4% year-over-year versus a drop of -7.9% a week ago, according to Refinitiv data. Companies in the “Consumer Discretionary,” “Communications Services,” and “Industrials” sectors have reported the biggest earnings growth while “Energy,” “Materials,” and “Health Care” have been the biggest drags.

This week, investors are highly anxious to see results from Apple and Amazon on Thursday following mostly upbeat results and forecasts from other tech giants last week. Arista Networks, AvalonBay, and Diamondback Energy report today.

Bears continue to argue that stock valuations are too high and that headwinds in the quarters ahead may dash hopes for earnings to return to growth in the second half of the year. Disinflation and slowing consumer spending are the key problems that bears see ahead, both of which will make it tougher for companies to generate profits.

Data

On the other hand, bulls believe that a weakening US dollar and possible rate cuts next year open the door to even higher stock prices ahead. Most bulls also doubt that US consumers will pull back on spending as much as some fear, believing instead that a strong labor market and cooling inflation will help keep spending stable.

Data last week backed up that view with Q2 Gross Domestic Product (GDP) showing a fourth straight quarter in a row of expansion and PCE Prices showing inflation cooling more than expected.

The next major test is the July Employment Report on Friday, which is expected to show a gain of +200,000 jobs with the unemployment rate holding at 3.6%.

Other employment data this week includes the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday and ADP’s private payroll report on Wednesday. ISM Manufacturing on Tuesday and ISM Services on Thursday will also provide as to how the economy is doing.

The only data today is the Dallas Fed Manufacturing Survey. Moral of the story, Wall Street bulls believe the Fed is done raising rates. The market has the odds at about 33% that rates will be higher following the next two Fed meetings (the next Fed meeting is Sept. 19-20, then the following is Oct. 31-Nov 1). The odds of the Fed cutting rates this year is currently estimated to be under 10%. But most in the market still think the Fed will cut rates two or three times by the end of 2024. Wall Street bulls argue that many investors and traders have simply been paying too much attention to the macroeconomic headlines and not enough attention to corporate profit margins and the fact they could improve steadily during the next several months.

In Conclusion

In other words, many bulls on Wall Street are thinking perhaps the worst might now be behind us as the Fed is mostly done hiking rates and inflationary pressure has mostly subsided.

Keep in mind, however, gasoline prices have pushed back to 8-month highs, and food and housing inflation hasn’t cooled all that much. Meaning that the inflation monster might continue to stay alive and be more difficult to kill than the bulls are believing.