Earnings Season Starts Centered on Major US Banks

Weakness in New York Stock Market Entering the New Year
Optimistic Outlook for Q4 Earnings Last Year

Starting later this week, major U.S. banks such as JP Morgan Chase and Wells Fargo will begin releasing corporate earnings reports in earnest. Despite the New York Stock Exchange showing weakness since the beginning of the year, Wall Street is flooded with optimistic views that fourth-quarter earnings from last year will surpass market expectations. However, the key factor that will determine the future market trend is expected to be the first-quarter earnings guidance, not the fourth-quarter results.

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According to FactSet on the 7th (local time), the net profit of S&P 500-listed companies in the fourth quarter of last year is estimated to have increased by 1.3% year-over-year, marking two consecutive quarters of growth. Earnings per share (EPS) for the fourth quarter during the same period are also expected to have risen by 2.4%. Goldman Sachs recently expressed optimism in an investor memo that the fourth-quarter earnings of S&P 500 companies will exceed market expectations.

The earnings announcements from major banks such as JP Morgan, Wells Fargo, and Citigroup, which are typically regarded as the kickoff of Wall Street’s earnings season, will take place on the 12th. On the same day, Delta Air Lines and UnitedHealth will also release their earnings. Rachel Siddiqui, Chief Investment Strategist at Neuberger Berman, described this as "a very important earnings season to confirm fundamental trends."

However, market attention is expected to focus on the first-quarter earnings guidance this year. The Wall Street Journal (WSJ) reported, "Investors will closely watch what corporate executives, including those from the largest U.S. banks, say about economic outlooks." Since the cumulative effects of monetary tightening and high inflation are expected to become visible in corporate earnings starting this year, there is a high possibility that downward pressure could be applied to the New York Stock Exchange depending on these guidances.

Accordingly, there are growing views that fourth-quarter earnings will not drive a rally in the New York Stock Exchange. Earlier, the S&P 500 index, which is centered on large-cap stocks, recorded a 1.5% decline in the first week of the new year. In particular, technology stocks that led last year’s rally showed notable weakness, with Apple and Microsoft (MS) falling 5.9% and 2.2%, respectively. According to Wells Fargo, among the 20 companies that have already released earnings, 12 saw their stock prices decline on the day of the earnings announcement.

Meanwhile, investors are also awaiting inflation indicators that could impact the Federal Reserve’s monetary policy. Since the employment report for December last year, which was released earlier, showed mixed figures and did not provide clear policy hints, investors are expected to seek confirmation of the recent disinflation trend through inflation data and gauge the future direction of monetary policy.

Currently, Wall Street expects the Consumer Price Index (CPI) for December last year, to be released on the 11th, to rise by 0.2% month-over-month and 3.3% year-over-year. This represents a larger increase than the previous month. However, the core CPI, which excludes the volatile energy and food sectors, is estimated to have increased by 0.2% month-over-month and 3.8% year-over-year during the same period, indicating a slowdown compared to the previous month. The Producer Price Index (PPI) will be announced on the 12th.

If inflation indicators confirm a faster-than-expected slowdown, market expectations for interest rate cuts are likely to gain momentum. Conversely, if the data falls short of expectations, it will strengthen claims that the market’s optimism has been excessive, likely leading to a stock price correction. According to the Chicago Mercantile Exchange (CME) FedWatch, the interest rate futures market predominantly expects the Fed to begin cutting rates as early as March, lowering the current U.S. interest rate of 5.25?5.5% to 3.75?4.0%.