The recent stock market downturn underscores a growing concern among economists and investors: stubbornly high inflation may derail the Federal Reserve’s anticipated interest rate cuts. This fear was further stoked by last week’s disappointing earnings reports from major banks.
With more big names like Bank of America, Goldman Sachs, Morgan Stanley, United Airlines, and Netflix scheduled to unveil their quarterly results in the coming days, the market’s focus remains firmly fixed on corporate America’s health. Meanwhile, March’s retail sales data, due Monday, will offer crucial insights into consumer spending patterns, a key economic barometer.
Fading Hopes for Rate Cuts
Recent economic data, including strong labor market figures and persistent inflation, have prompted many economists to revise their outlook on the Fed’s monetary policy. One of our analysts believes that the series of better-than-expected economic reports casts doubt on the likelihood of rate cuts materializing in June. This sentiment aligns with the projections of teams at Bank of America and Deutsche Bank, who have pushed their expectations for the first easing to December, suggesting a single cut in 2024.
“The data suggest inflation might remain elevated for some time,” another analyst commented. “If core inflation persists through March and April, an earlier rate cut in June or September becomes improbable unless signs of a weakening labor market emerge.”
Interestingly, even Bloomberg data reflects a consensus towards only two rate cuts this year. Furthermore, some economists caution that even this measured reduction could be delayed if inflation proves resistant or the political landscape delivers policies likely to fuel further price pressures.
Consumer Spending: A Key Indicator
With the outlook on rate cuts growing cloudier, analysts will meticulously dissect Monday’s retail sales report as a critical indication of consumer resilience. Economists expect a modest 0.4% month-over-month increase in March, a potential continuation of February’s rebound after January’s decline.
“While the outlook remains uncertain, we anticipate sustained consumer spending underpinned by robust wage growth,” remarked one analyst. “Real-time data on credit card spending suggests that consumption remained above its pre-pandemic trend through March.”
Banks Paint a Mixed Picture
While initial earnings releases from major banks haven’t inspired investor enthusiasm, they still provide valuable insights. Declines in net interest income reported by JPMorgan Chase, Wells Fargo, and Citigroup reflect the complex economic environment. While JPMorgan maintained its 2024 guidance, analysts had anticipated a slightly more optimistic outlook.
“The market remains hopeful for a soft landing,” an analyst opined. However, the potential for earnings reports to disappoint even healthy fundamentals introduces an element of risk, especially as expectations continue to climb. This early trend signals that guidance from other banks in the coming week could be a crucial indicator for investors.
The Search for Growth Drivers
As we dive into Q1 earnings season, analysts are intently focused on how companies are generating earnings growth. With last year’s emphasis on cost-cutting measures like layoffs potentially reaching its limit, a shift toward revenue growth is essential to sustain the current market rally and align with the signs of an accelerating US economy.
“Companies aggressively focused on reducing labor costs in the past year will need to demonstrate increased demand to maintain a positive growth trajectory,” noted an analyst. S&P 500 revenue projections for Q1 suggest a 3.4% growth rate, falling short of the historical average.
In conclusion, this earnings season takes on increased significance as the market grapples with the implications of fading rate cut expectations. “With markets rallying thus far in 2024 despite the Fed’s hawkish stance, solid earnings results are becoming increasingly important to provide much-needed fuel for continued growth,” one of our analysts stated. “The question now is whether corporate America can truly deliver.”
