Investors count on upward market momentum in the week ahead as earnings rain down

Published Fri, Jul 14 202311:03 AM EDTUpdated Fri, Jul 14 20234:08 PM EDT

Stocks could continue to gain momentum in the week ahead as traders turn their attention to earnings results after the past week's softer inflation news. The Dow Jones Industrial Average on Friday notched its best week since March after encouraging consumer and wholesale inflation in June cemented the likelihood that the Federal Reserve is closer to the end of its rate-hiking campaign. Traders see a 95% certainty the Federal Reserve will tighten again at the central bank's July meeting, according to the CME Group's FedWatch Tool . They're 81% sure the Fed will stand pat in September. "I think the Fed is kind of locked in for another hike," said Sage Advisory's Rob Williams. "But given this inflation data, I think they're kind of one and done." Both inflation prints — Wednesday's consumer price index and Thursday's producer price index — are the last major economic reports central bank policymakers will get before their July meeting. In fact, Fed speakers will go dark next week as the Open Market Committee enters a "blackout period" before they convene for a two-day meeting starting the following week, on the 25th and ending on the 26th. Instead, traders will turn their attention to earnings next week. Market participants are expecting results to turn in a third straight quarter of lower profits, with FactSet data showing that S & P 500 earnings are forecast to have fallen nearly 9% year over year in the latest three months. Still, those low expectations could leave room for positive surprises, as was the case in the last earnings season. Some market participants expect this period could mark the trough for earnings, and urge traders to pay more attention to forward guidance. "The bar is set so low," said CFRA's Sam Stovall, citing stronger earnings expectations for the remainder of the year and in to 2024. "It sort of says 'well, gee, maybe this ends up being the trough quarter for this earnings cycle.' And as a result, investors might be encouraged because next quarter is expected to be down 1.7%. The fourth quarter is expected to be up 7.4%. And next year, expected to be up 12%," Stovall added. "So, I think investors are beginning to look forward to say, 'you know what, maybe we will soon be climbing out of the depths of this earnings recession.'" That would be a positive development for equities, which have already enjoyed a strong start to the year that Stovall, among others, expects will continue in the second half. A recent broadening of this year's rally has added to that optimism. "It's not just a relatively small number of mega cap technology companies that are driving the market higher – we're seeing much more widening of the rally and a lot more companies that had struggled throughout the year or just barely been positive starting to do well," BMO Wealth Management's Chief Investment Officer Yung-Yu Ma said in a weekly market update. "And that's a great sign for the market and market health." To be sure, not everyone agrees that this earnings season will be a good one. In a note this week, MRB Partners warned traders that frothy valuations have "raised the stakes" for earnings to meet or exceed expectations. In particular, the firm said tech stocks are "priced for perfection" and should be avoided. U.S. equities are trading at roughly 20 times earnings, far above long-term averages of about 15 or 16 times earnings. In the event of a recession, those valuations could go even lower. "They really have no room to disappoint," Sage Advisory's Williams said. "Even if people expect, you know, not a bad recession, I think most people are on the page that we're going to continue to slow down," Williams added. "Equities are in a difficult position because earnings are very high to where they typically are at this point in the cycle. So I think the skew for equities is down, or at least the risk is skewed to the downside." More major banks ahead Bank of America and Morgan Stanley both post results next Tuesday. That follows stronger-than-expected reports this past week from JPMorgan Chase and Wells Fargo . Investors are closely watching banks after their struggles earlier in 2023 after the collapse of Silicon Valley, and are keeping an eye on the impact high interest rates will have on deposits and lending. "A lot of the macro level data that we've seen since Silicon Valley Bank has indicated that while lending has tightened a bit, it hasn't tightened so much that it's squeezing small business or squeezing the economy in a way that's meaningful," said Baird's Ross Mayfield, adding he's especially interested in how much banks are setting aside in loan loss reserves for commercial real estate. The week ahead will be light on major economic data. However, June retail sales data is on the docket on Tuesday, and will give insight into the state of consumer spending. Investors are watching for any signs of weakness as fiscal stimulus savings are exhausted, and borrowers resume student loan payments in the fall. Week ahead calendar Monday 8:30 a.m. ET: Empire State Index (July) Tuesday 8:30 a.m. ET: Retail sales (June) 9:15 a.m. ET: Industrial production (June) 10 a.m. ET: NAHB housing market index (July) Earnings: Bank of America , Morgan Stanley , Bank of N.Y. Mellon , Lockheed Martin , PNC Financial , J.B. Hunt Wednesday 8:30 a.m. ET: Housing starts (June) Earnings: Nasdaq , Baker Hughes , Citizens Financial , Goldman Sachs , Halliburton , Kinder Morgan , Las Vegas Sands , IBM , Tesla , Netflix Thursday 8:30 a.m. ET: Initial jobless claims (Week ended July 15) 10 a.m. ET: Existing home sales (June) Earnings: Discover Financial , Truist , American Airlines , D.R. Horton , Equifax , Johnson & Johnson , KeyCorp , Snap-On , United Airlines , Newmont , CSX Friday Earnings: Comerica , PPG , Roper Technologies , American Express