Investors will be awaiting inflation data and the start of second-quarter earnings reports after a holiday-shortened week saw stocks close near all-time highs.
With job growth slowing, investors will be keeping a close eye on the June Consumer Price Index (CPI) on Thursday as it raises the possibility that the Federal Reserve (Fed) will cut interest rates in September. Fed Chairman Jerome Powell’s semi-annual testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday will also be a key focus for investors.
On the corporate side, second-quarter earnings season kicks off on Friday morning with major U.S. financial institutions including JPMorgan (JPM), Wells Fargo (WFC), and Citi (C). Earnings from PepsiCo (PEP) and Delta Air Lines (DAL) will also be in the spotlight early in the week.
Last week, the S&P 500 (^GSPC) rose nearly 2% and the Nasdaq Composite Index (^IXIC) gained over 3%, both finishing the week at record highs. The Dow Jones Industrial Average (^DJI), which has been significantly underperforming throughout the year, was up a more modest 0.5%.
The case for a September rate cut strengthens
The June jobs report released on Friday showed the U.S. economy added more workers than expected last month, but economists found some signs of a labor market slowdown in the report’s details.
The unemployment rate rose to 4.1%, the highest level since November 2021. Meanwhile, payroll gains in April and May were revised downward by 111,000, suggesting that the robust labor market gains of the past few months were not as robust as initially thought.
Several economists believe this announcement will lead the Fed to cut interest rates in September.
“The June jobs report provided further signs of a cooling labor market, with weaker-than-expected job growth, a rising unemployment rate and slowing earnings growth,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, wrote in a client note.
“With Federal Reserve officials increasingly focused on downside risks to the labor market, the June data supports our expectation that the Fed will cut rates in September and at each meeting thereafter.”
The report should “reinforce expectations of a September rate cut,” Neil Dutta, head of economics at Renaissance Macro, wrote in a client note on Friday.
“Economic conditions are cooling and the trade-offs will be different for the Fed,” Dutta added. “Powell should use July to set up a rate cut in September.”
The story continues
As of Friday, investors see about a 75% chance that the Fed will cut rates by its September meeting, up from 64% the previous week, according to CME’s FedWatch tool.
Powell is scheduled to give his semi-annual testimony before Congress this week, and investors will be listening closely for hints of policy change ahead of the July 30-31 meeting.
Read more: How the Federal Reserve’s interest rate decision will affect your bank accounts, CDs, loans and credit cards
Price Check
While the slowing labor market strengthens the case for the Fed to cut rates, inflation remains a key factor.
Inflation readings for May showed prices rising at their slowest pace in 2024. Powell said last week that the readings “suggest that we are returning to a disinflationary path.”
The first test of whether this path continues will be the release of the June Consumer Price Index (CPI) report on Thursday morning.
Wall Street economists expect headline inflation to rise just 3.1% year-on-year in June, slowing from a 3.3% increase in May. The May data marked the lowest year-on-year inflation rate since July 2022. Prices are expected to rise 0.1% month-on-month, up slightly from the flat reading in May.
On a “core” basis, which excludes food and energy prices, the CPI is forecast to have risen 3.4% year-on-year in June, unchanged from May. The monthly core price increase is forecast to be 0.2%.
“We expect the June CPI report to be a further boost to confidence following an undeniably strong May report,” Stephen Juneau, US economist at Bank of America, said in a research note ahead of the release.
Read more: Will the inflation fever die down? Price increases for everyday expenses finally ease.
Big banks set the stage
Earnings season is upon us again, and the financial sector (XLF) will be in the spotlight in the coming weeks, with 40% of S&P 500 companies scheduled to report earnings this period coming from the financial sector, according to FactSet.
The sector is not expected to lead in earnings growth this quarter, with analysts predicting second-quarter earnings growth of 4.3% year over year, which would place the Financials sector 7th out of 11 S&P 500 sectors in earnings growth.
As Yahoo Finance’s David Hollerith recently reported, regional banks remain a major concern for the industry: Regional banks are expected to report a 26% decline in revenue growth year over year.
The logo on the JPMorgan Chase headquarters building in New York City on May 26, 2023. (Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)
‘High Barrier’ for Second-Quarter Revenue
Companies that emerged from the revenue slump in 2023 are finally facing a new challenge in this fiscal year’s financial statements – a tall hurdle to overcome.
The consensus forecast is for S&P 500 earnings to grow 8.8% year-over-year in the second quarter, which would be the index’s highest year-over-year earnings growth since the first quarter of 2022, according to FactSet.
“We expect EPS upside to be limited as consensus estimates set a higher bar than last quarter,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said in a client note looking ahead to earnings season.
With markets trading near record highs ahead of the earnings releases, Kostin and other strategists are cautious about how much upside investors can expect if the results beat Wall Street expectations.
Kostin noted that stocks of companies that beat expectations in the last quarter outperformed the S&P 500 by 3 basis points the following day, well below the historical average of 100 basis points.
Given that investor sentiment remains high heading into today’s earnings releases, Kostin reasoned that “payouts for beating expectations this quarter should be smaller than average, though not as extreme as in the first quarter.”
Scott Kronert, U.S. equity strategist at Citi, echoed that sentiment, warning that the prospects for any significant upside in stocks this quarter are limited given “implied high growth expectations.”
“To sustain the recent gains or even rise from here, the market will likely need to see increases coupled with stronger than expected increases from solid execution,” Kronert said in a weekly research report on Friday. “The concern is that while fundamental trends are favorable and consensus expectations are achievable, valuations suggest the buyer side will demand more.”
Overall, this has skewed Wall Street’s expectations about how much impact second-quarter earnings reports will have on the stock market.
According to research by Binky Chadha, chief equity strategist at Deutsche Bank, the S&P 500 rises 80% of the time during earnings season, with an average return of 2%.
“However, the upside is likely to slow as markets surge ahead of earnings season and there is a bias towards equities,” Chadha said.
Weekly Calendar
Monday
Economic Data: New York Fed 1-year inflation expectations, June (3.17% m/m)
Earnings: There were no notable earnings announcements.
Tuesday
Economic Data: NFIB Small Business Optimism Index, June (expected 89.9, previous 90.5); Fed Chairman Powell testifies before the Senate Banking Committee.
Revenue: Helen of Troy (HELE)
Wednesday
Economic Data: MBA mortgage applications, July 5 (previously -2.6%); Wholesale inventories, May ending (previously 0.6%); Fed Chairman Powell testifies before House Financial Services Committee
Revenue: Manchester United (MANU), WD-40 (WDFC), PriceSmart (PSMT)
Thursday
Economic data: Consumer Price Index, m/m, June (expected +0.1%, previous +0%); Consumer Price Index excluding food and energy, m/m, June (expected +0.2%, previous +0.2%); Consumer Price Index, y/y, June (expected +3.1%, previous +3.3%); Consumer Price Index excluding food and energy, y/y, June (expected +3.4%, previous +3.4%); Real average hourly earnings, y/y, June (previous +0.7%); Real average weekly earnings, y/y, June (previous +0.5%); Initial unemployment insurance claims, week ending July 6 (previous 238,000).
Revenues: Conagra Brands (CAG), Delta Air Lines (DAL), PepsiCo (PEP), Progressive (PGR)
Friday
Economic Data: Producer Price Index MoM June (Expected +0.1%, Previous -0.2%); Producer Price Index YoY June (Previous +2.2%); Core Producer Price Index MoM June (Expected +0.1%, Previous 0%); Core Producer Price Index YoY June (Previous +2.3%); University of Michigan Consumer Sentiment Index Preliminary July (Expected 67, Previous 68.2)
Revenues: BNY Mellon (BK), JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC)
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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