Analysts are expecting companies in the S&P 500 to report an overall dip in earnings for the fourth quarter, down nearly 2 per cent from a year earlier, according to FactSet. If they’re right, it would be the fourth quarter in the last five where profits have fallen.
After the initial week of earnings reporting season, companies that have been topping analyst forecasts for profits and revenue have been getting smaller bumps to their stock prices than usual, according to strategists at Bank of America.
Companies that fall short of expectations, meanwhile, have seen their stock prices get punished more than usual. It all points to “a higher bar after a big rally”, Savita Subramanian and Ohsung Kwon wrote in a BofA Global Research report.
That big rally, which carried the S&P 500 to a record for the first time in two years, came largely on hopes that a cool-down in inflation will allow the Federal Reserve to cut interest rates several times this year. It would be a sharp turnaround from the past two years, when the Fed jacked its main interest rate drastically higher in hopes of slowing the economy enough to grind down high inflation.
Some stronger-than-expected reports on the economy recently have forced traders to push out their forecasts for when the Fed will begin cutting rates. They overall see a less-than-42 per cent probability that it could begin in March, down from more than 80 per cent a week ago, according to data from CME Group.
But the expectation is still for the Fed to cut rates more this year than the three times it’s indicated.
Some upcoming reports on the economy could shift those expectations further. On Thursday, the government will give its first estimate for how strongly the economy grew during the last three months of 2023.
Economists expect it to show the economy is still growing, but at a slower pace than during the summer. That’s exactly what the Federal Reserve wants to see, because too strong an economy would keep upward pressure on inflation.
On Friday, the government will release the latest reading for the inflation gauge that the Fed prefers to use. Economists expect it to show inflation held steady at 2.6 per cent in December from a month earlier.
Treasury yields have eased significantly since October on expectations for coming rate cuts. That in turn has relaxed the pressure considerably on the stock market and helped it to rip higher. Yields dipped further on Monday.
The yield on the 10-year Treasury fell to 4.09 per cent from 4.13 per cent on Friday and from 5 per cent in October.
The two-year Treasury yield, which tends to move more on expectations for action by the Fed, slipped to 4.36 per cent from 4.39 per cent.
In stock markets abroad, indexes tumbled in China as worries continue about the strength of the recovery in the world’s second-largest economy. Stocks fell 2.3 per cent in Hong Kong to bring their loss for the young year to date to 12.2 per cent. Stocks also tumbled 2.7 per cent in Shanghai.
China’s commercial banks kept their loan prime rate unchanged on Monday. That disappointed investors hoping for strong moves to juice China’s economy.
Japan’s Nikkei 225 did better, rising 1.6 per cent with expectations that the Bank of Japan will keep its interest rates ultra-low following its two-day meeting that began on Monday.
