Key Takeaways

After posting all-time high last Friday, market extends gains in overnight trading

Earnings season accelerates this week with semiconductors, airlines, credit card firms

Key data ahead include a first look at Q4 GDP, Fed’s favored inflation metric

(Monday market open) Major U.S. indexes built on last week’s record highs early Monday as Treasury yields dipped and investors strapped in for a week packed with earnings and central bank meetings.

Friday’s all-time high for the S&P 500® index (SPX) lifted it to 1.5% gains for 2024, but vigor flowed mainly to heavyweight tech and communication services stocks. The rest of the market struggled. That shows in the 1.3% year-to-date drop for the SPX Equal Weight Index (SPXEW), which weighs all stocks equally rather than by market capitalization.

Some of the heavyweights report this week, including Tesla (TSLA), Intel (INTC), and Netflix (NFLX), as well as a host of transport and consumer products firms. In addition, central banks in Japan, Canada, and Europe will gather in coming days to consider rates ahead of next week’s Federal Reserve meeting. Analysts don’t expect policy changes from the banks that meet this week.

The markets also build in virtually no chance of a Fed policy change at its January 30–31 meeting, either, and U.S. investors spent much of last week discounting chances of a March Fed rate cut, helping send Treasury yields to five-week highs intraday Friday before backtracking. Robust U.S. economic data outside the slumping manufacturing sector suggests the Fed has time to wait.

“This has led to rotation away from the interest rate-sensitive sectors and back to tech and communication services,” said Joe Mazzola, director, trader education at Schwab.

The broad rally last month occurred when Treasury yields were in free fall on hopes of a March rate cut, lifting small caps and dividend-paying stocks that typically pop when borrowing costs recede.

The futures market now prices in just 48% chances of a 25 basis point March rate trim, down from 77% a week ago. The fact that stocks rallied last week even as rate-cut probabilities declined suggests that at least temporarily, the fixed income and equity markets have pulled apart after long trading in sync. That’s a trend worth watching.

While tech rose 3% last week and communication services rose 1%, utilities, materials and real estate all fell more than 2.5%. This affects market breadth, as SPX stocks trading above their 50-day moving averages fell to 75% Friday from the high 80’s earlier this year. Tech stocks continued to push higher in Monday’s premarket trading.

Futures based on the SPX rose 0.35% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) were up 0.25% and Nasdaq-100® (NDX) futures added 0.5%.

Morning rush

The 10-year U.S. Treasury Yield (TNX) fell five basis points to 4.09%.The U.S. Dollar Index ($DXY) steadied near 103.20.The Cboe Volatility Index® (VIX) stayed in its recent trading range at 13.67, a level not implying much uncertainty in the market.WTI Crude Oil (/CL) rose 0.45% to $73.74 per barrel after another weekend of heightened Middle East tensions.

What to watch

In the lead: Stay tuned after the open for the Conference Board’s December Leading Economic Index (LEI), which has fallen 20 consecutive months. Traditionally, this corresponds with looming recession. However, last week’s surprise jump in consumer sentiment and solid Retail Sales suggest that shoppers aren’t abandoning their carts, though there’s anecdotal evidence that many retail outlets are luring consumers with coupons and sales.

Consensus on Wall Street is for an LEI drop of 0.3%, less than the 0.5% decline in November, according to Trading Economics. Watch the six-month index, which smooths out month-to-month turbulence in the data. Last time, the six-month decline was 3.5%, versus 4.3% the prior month.

Two reports stand out later this week: The U.S. government’s first look at Q4 Gross Domestic Product (GDP) early Thursday and Personal Consumption Expenditure (PCE) prices on Friday. That’s the Fed’s favorite inflation metric, and analysts expect a 3% year-over-year rise in core PCE stripping out food and energy, down from 3.2% in November. Analysts expect a 2% rise in GDP, less than half the 4.9% gain in Q3, according to Briefing.com.

Central banks on tap: Tonight brings an interest rate decision from the Bank of Japan (BoJ), one of the only major central banks yet to raise rates. Inflation there has been more subdued lately despite rising wages, Reuters reported, leading to expectations that the BoJ won’t hike rates this time. But analysts still see growing chances of higher rates by spring, which could have global implications.

“The BoJ’s policy has enabled Japan to be an important source of investment funding,” said Jeffrey Kleintop, chief global investment strategist at Schwab. “Japanese investors’ net outflow to the rest of the world totals over $3 trillion, including holdings of more than $1 trillion in U.S. Treasuries. Any rate hikes over the next year hold the potential to prompt Japanese investors to sell foreign stocks and bonds and bring them home—boosting Japanese assets at the expense of markets elsewhere.”

The Bank of Canada straps on its skates Wednesday and the European Central Bank (ECB) gathers Thursday. There’s a growing sense that rate cuts aren’t on the immediate horizon.

“Inflation ticked higher in most regions globally in December, and commentary by central bankers show a reluctance to start cuts too soon and having to stop or reverse course,” said Michelle Gibley, director of international research at the Schwab Center for Financial Research. “Stocks could be vulnerable if central bankers continue to push back on market expectations for the timing of rate moves.”

Stocks in spotlight

Earnings estimates slip: A week into earnings season, analysts’ estimates for Q4 results keep sliding. The average S&P 500 earnings per share (EPS) forecast is now negative 1.7%, research firm FactSet reported. That’s down from 1.6% growth December 31. Seven sectors are now reporting lower earnings compared to then based on negative EPS surprises and downward revisions to EPS estimates.

So far, just 10% of S&P 500 companies have reported Q4 earnings, and 62% surpassed Wall Street’s estimates, FactSet said. It’s still early, but that’s a relatively low figure. The SPX is priced at 19.5 times analysts’ forward EPS estimates, a high level historically that implies firm earnings growth ahead.

Tech heavy: This week’s earnings calendar features a full helping of info tech results as Texas Instruments (TXN), Intel, and IBM (IBM) report. TXN kicks things off tomorrow, followed on Wednesday by IBM and Thursday by Intel. TXN and INTC could give investors a better look at the health of U.S. semiconductor firms after Taiwan Semiconductor (TSM) gave a rosy demand forecast last week that helped lift the sector to all-time highs.

Tesla drives up Wednesday afternoon with several issues likely on investors’ minds, including recent reports of charging problems during the U.S. cold spell, Chinese competition, and the decision by Hertz (HTZ) to sell 20,000 electric vehicles in its rental fleet. Shares of Tesla are down 14% year-to-date.

Other earnings include United Airlines (UAL), whose results this afternoon could be interesting after rival Delta Air Lines (DAL) released weaker-than-expected 2024 guidance earlier this month, sending Delta and other airline stocks down sharply. United shares have lost about 20% over the past 12 months and are down nearly 6% so far this year.

$DJI members Johnson & Johnson (JNJ) and Procter & Gamble (PG) both are expected to report tomorrow, along with Netflix (NFLX). Visa (V) and American Express (AXP) could provide insight into consumer spending later this week.

Stocks on the move early Monday include:

Home Depot (HD) and Lowe’s (LOW) shares both pulled back 0.7% in premarket trading after receiving downgrades from an Oppenheimer analyst who now has a more cautious stance in the near-term toward home improvement retail.D.R. Horton (DHI) shares fell 0.8% following Seaport Research downgrading both DHI and rival home builder Toll Brothers (TOL), saying expected tailwinds for the industry may become headwinds.Spirit Airlines (SAVE) rose 1.3% after the company and JetBlue (JBLU) appealed a court ruling that blocked their planned merger.Archer-Daniels-Midland (ADM) shares fell 14% after the company cut its earnings outlook and placed its chief financial officer on leave as the agricultural firm cooperates with the Securities and Exchange Commission (SEC) in a probe of the company’s accounting practices, Bloomberg reported.

Eye on the Fed

Early today, futures trading pegged chances at 99.5% for the Federal Open Market Committee (FOMC) holding rates steady following its January 30–31 meeting, according to the CME FedWatch Tool. The market prices in a 48% chance the funds rate will be a quarter-point lower than now after the Fed’s March meeting, down from 77% a week ago

CHART OF THE DAY: A TALE FOR OUR TIMES. The market’s done a complete turnaround since the start of the year. Back then, the S&P 500 Equal Weight Index (SPXEW-candlestick) led the way as the rally broadened. Then, over the last week, tech and communication services stocks in the Nasdaq 100 (NDX-purple line) skyrocketed as the average stock in the SPX fell. Data sources: Nasdaq, S&P Dow Jones Indices.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Doing more with less: Forecasts remain widespread for possible double-digit earnings growth in 2024, and companies that do grow earnings will accomplish that despite the highest interest rates in two decades. That speaks to cost-cutting efforts and the ability to raise prices over the last two years as inflation rose. There’s also a bit of a tailwind from wholesale costs basically stalling late last year. Still, companies might not enjoy as much pricing power now as they did in 2021–2023 as consumers increasingly push back. Cost cutting continues, evidenced by several recent layoff announcements. Alphabet (GOOGL), Amazon (AMZN), and Macy’s (M) are among companies cutting their workforces. With earnings season in full swing and the holidays far behind, coming weeks could bring more layoff announcements. The question is whether and when that might show up in initial weekly jobless claims, which fell to 16-month lows last week.

Semiconductors at bat: While much of the chip excitement surrounds AI, the basic blocking and tackling for most of the industry remains in the established businesses of data centers, video games, and use in consumer products like phones and automobiles. The entire sector got a boost last week when Taiwan Semiconductor released a bullish forecast for chip demand, but each company in the sector serves different parts of the market and should be looked at on an individual basis. If auto sales hit a speed bump, for instance, that could hurt some chip companies and hardly affect others. Also, Taiwan Semiconductor anticipates weakness in sales of chips used for phones early this year, which could be unpleasant tidings for Intel, Qualcomm (QCOM), and Broadcom (AVGO), all leaders in the cell phone chip industry.

Goods flow: While pondering this morning’s Leading Economic Index, consider one possible reason U.S. manufacturing continues to sputter: China. Even as the Biden administration pumps $2 trillion into U.S. factories and infrastructure, China floods the U.S. market with similar goods often at lower prices, the Associated Press reported last week. The same is true in Europe. As a result, the White House is considering new protectionist measures against China, AP said, even though tariffs on hundreds of billions of dollars of Chinese goods over the past five years haven’t necessarily slowed the flow. China continues to focus on high-tech products like EVs and semiconductors, posing the threat of additional competition, and China’s industrial policy emphasizes exports to support its factory sector amid a slump in the property market.

Calendar

Jan. 23: Expected earnings from 3M (MMM), D.R. Horton (DHI), Johnson & Johnson (JNJ), Procter & Gamble (PG), Halliburton (HAL), Verizon (VZ), Netflix (NFLX), and Texas Instruments (TXN).

Jan. 24: Expected earnings from Abbott Labs (ABT), Kimberly-Clark (KMB), IBM (IBM), and Tesla (TSLA).

Jan. 25: December Durable Orders, December Durable Goods, Q4 GDP, December New Home Sales, and expected earnings from Alaska Air (ALK), American Airlines (AAL), Comcast (CMCSA), Dow (DOW), Intel (INTC), Union Pacific (UNP), and Visa (V).

Jan. 26: December Personal Income, December Personal Spending, December PCE Prices, and expected earnings from American Express (AXP).

Jan. 29: Expected earnings from Whirlpool (WHR).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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