Countdown to Us Earnings Season Boosts Stocks

Stocks experienced slight gains as investors prepared for the upcoming earnings reports from major players in the financial sector, posing a test to the market's resilience in 2024.

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Earnings season is set to kick off in earnest on Friday, with JPMorgan Chase & Co., Wells Fargo & Co., and Citigroup Inc. among the companies reporting. Analysts anticipate a continuation of profit growth for S&P 500 companies for the second consecutive quarter, fueled by a robust economy and sustained consumer demand.

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Additionally, strong margins from prominent technology firms are expected to play a significant role in driving earnings. Market participants also sifted through inflation data and statements from Federal Reserve officials to glean insights into the central bank's future actions.

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George Ball, chairman of Sanders Morris, emphasized the importance of corporate earnings in driving market performance, particularly in the current environment of elevated interest rates. He noted that earnings have surpassed expectations despite the prevailing interest rate backdrop, indicating a shift away from reliance on Fed rate cuts as the primary market driver.

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The S&P 500 index remained close to 5,170, with technology giants such as Alphabet Inc., the parent company of Google, leading the charge towards potentially reaching a record market value of $2 trillion. However, the KBW Bank Index experienced a decline. Meanwhile, yields on 10-year Treasury bonds increased by two basis points to 4.57%.

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The euro depreciated following signals from the European Central Bank indicating an imminent rate cut due to moderating inflation.

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As banks are poised to kick off first-quarter earnings, investors will closely scrutinize their results to assess whether growth justifies the S&P 500's price-earnings ratio, which currently stands roughly 20% above its 10-year average.

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With stocks trading at 21 times profits, corresponding to an earnings yield of 4.8%, the valuation appears increasingly unfavorable, especially as 10-year Treasury yields climb to 4.5%. In fact, the valuation premium of stocks compared to bonds is now at its lowest level in two decades.

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Investor attention will focus on banks' outlook and commentary regarding key profit drivers such as net interest income and investment banking activities. Expectations of fewer interest rate cuts could bolster prospects for net interest income among large-cap banks and potentially prompt upward revisions to earnings guidance.

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While the latest inflation data provided some relief, investors should brace for fewer rate cuts in the coming year, with projections ranging from one to two cuts, and the first potential move not expected until the July meeting.

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Federal Reserve officials, including John Williams and Thomas Barkin, have signaled a cautious approach, emphasizing the need to monitor price pressures and the economy's trajectory before considering further interest rate adjustments.

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