The U.S. stock market seems poised for a positive start to the week, as investors look to extend recent gains. Of note, the broader equity futures have been showing some strength in pre-market trading, which might suggest an upward bias to today’s session. Meanwhile, inflation and corporate profits will probably be the main areas of focus for investors in the days ahead.
On the economic front, no major reports are scheduled for today. However, on Thursday the Consumer Price Index (CPI) for December will be released. Most analysts expect the report will show that prices rose around 6.5% for the month (year over year), which would be an improvement from the roughly 7% reading posted in November. Inflation likely peaked over the summer, after logging a 9% increase last June. However, prices remain elevated, and the Federal Reserve seems committed to further interest-rate hikes in 2023. Some investors have voiced concerns that a tighter monetary policy could lead to a steep recession, and they are hoping that the central bank will change its course. Needless to say, speculation about the direction of interest rates has led to considerable market volatility over the past several months.
In the corporate arena, the fourth-quarter earnings season will commence later this week. On Friday, we will hear from JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC). It should be mentioned that large banks lend to a diverse range of commercial institutions operating across many different industries, and also extend mortgages and credit to numerous consumers. As a result, banks and large financial institutions tend to serve as a barometer for the broader economy. We believe the upcoming earnings season will be particularly important, as corporations will report their final numbers for 2022, and provide initial guidance for 2023. At the current time, the P/E (price-to-earnings) multiple for the broader market stands near the 16.0 mark, which seems reasonable. However, if too many corporations lower their guidance, investors may wonder if current valuations are appropriate.
From a technical vantage point, the stock market rally that started in the middle of October was temporarily derailed in December. As 2023 unfolds, it remains to be seen if stocks can regain their footing and stage a meaningful advance. The market did manage to move nicely higher last Friday, driven by a somewhat encouraging employment report, but it is unclear if traders will be able to extend those gains. Meanwhile, it is still worrisome that the technology sector that was so vital to the market in the past, seems to be out of favor with investors. Greater participation from the large technology issues would clearly help lift the major averages, and also improve investor sentiment.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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