Most equity indices gained pace on Friday on the back of the latest nonfarm payrolls data, which indicated a deceleration in wage growth for the month of December. It basically indicates that quantitative tightening measures employed by the Federal Reserve to tame inflation is now bearing fruit.

In the last week ended on January 6, the S&ampP 500 and Dow Jones indices gained 1.5% while the tech-heavy Nasdaq index rose 1%. The 10-year Treasury note fell 30 basis points last week and traded below 3.6%. The yield curve remains inverted, and the 2-year note now yields 4.3%.

Crude oil prices fell 7% last week due to a surge in COVID-19 cases in China, which could lower manufacturing output in the country, clouding the outlook for robust global demand. The price of WTI (West Texas Intermediate moved towards a three-week low of $73 per barrel.

 

What will drive the S&ampP 500 index this week

While macroeconomic challenges continue to weigh heavily on investor sentiment, Wall Street will be closely watching quarterly reports as the earnings will heat up. Big banks, including JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), and Blackrock (NYSE: BLK), are scheduled to report Q4 earnings on Friday.

It will be interesting to see the impacts of rising interest rates on the financials of these banking giants. Demand for loans across verticals such as consumer, mortgage, and corporate is expected to decline significantly. Further, revenue and fees generated from the investment banking division will also remain under pressure.

However, banks may also benefit from higher interest rates as net interest margins are likely to expand. Basically, the net interest margin is the difference between interest income and interest payments.

 

The Consumer Price Index data is key

The Bureau of Labor Statistics will release data for the Consumer Price Index (CPI) for December on Friday, providing market participants with an update on consumer inflation in the country. Prices are expected to rise 6.5% year over year in December and 0.1% compared to the last month. The CPI surged to a 40-year high of 9.1% in June 2022. In case the CPI increases by less than 6.5%, it will be the slowest inflation rate (on an annual basis) since October 2021.

A deceleration in inflation rates would mean the Federal Reserve might consider an easing of monetary tightening measures in the second half of 2023.

 

Earnings remain key for stock market investors

In addition to the big banks, companies such as Taiwan Semiconductor Manufacturing Company (NYSE: TSM), UnitedHealth (NYSE: UNH), and Delta Air Lines (NYSE: DAL) will report Q4 earnings this week. The S&ampP 500 and several other indices remain quite volatile during earnings season as companies provide a peek into the future with revenue and earnings forecasts.

It will be interesting to see how corporates navigate an environment of rising bond yields, high commodity prices, and the possibility of an economic recession.

In Q4 of 2022, companies part of the S&ampP 500 are expected to see a 4.1% decline in earnings, year over year, according to data from FactSet. It will the first annual decline in the bottom line since Q3 of 2020 when earnings fell 5.7% year over year.

A report from Investopedia suggests, “Of the companies issuing EPS guidance, 65 have issued negative guidance while just 35 have issued positive guidance. Analysts’ estimates for earnings growth have been downgraded steeply in recent months. In late September, the median projection for fourth quarter earnings growth stood at 3.5%.”

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