Traders ready for bank earnings as index approaches all-time high

  • Standard & Poor’s 500 jumped more than 1% on Monday.
  • The all-time high from two years ago at 4,818 beckons.
  • US December CPI on Thursday is projected to show core inflation falling.
  • JPMorgan, Bank of America, UnitedHealth Group and BlackRock report earnings this week.

The S&P 500 index has started the week off on the right foot in the first full week of trading for the year. The index closed up 1.4% on Monday, while the NASDAQ Composite leapt ahead 2.2% due to rising risk-on sentiment. The Dow Jones (DJIA) was able to overcome initial negativity from Boeing (BA) to close up nearly 0.6%.

The market is largely excited for a return to earnings season as the big banks kick-off the round of fourth-quarter releases on Friday. Additionally, December’s Consumer Price Index (CPI) for December arrives on Thursday and will give the market further cues on how soon it can expect interest rate cuts from the Federal Reserve.

S&P 500 News: Large financials report Q4 results on Friday

It sure seems like we just finished with third-quarter 2023 results not too long ago. Already though, 2024 begins with some of the largest public companies preparing to deliver their results. 

On Friday, a blistering number of high-profile banks, financial institutions and the largest health insurer in the United States will release results for the quarter ending in December. These include BlackRock (BRK), Wells Fargo (WFC), Bank of America (BAC), JPMorgan (JPM) and UnitedHealth Group (UNH).

Jefferies (JEF), one of the smaller investment banks on Wall Street, was actually the first to report. After the close on Monday, Jefferies beat expectations by posting GAAP earnings per share (EPS) of $0.29 for the fourth quarter on revenue of $1.2 billion. Revenue came in down 17% from a year ago, but Jefferies still beat the sales consensus by $50 million and by 8 cents on the bottom line.

UnitedHealth Group reports before the open on Friday. The insurer has been given the raised eyebrow by most analysts going into Friday’s release. Rising healthcare costs make earnings less certain, and CVS Health (CVS) announced on Monday that its managed care costs in Q4 would far exceed initial guidance. Both revenue and net income for UnitedHealth’s Q4 are expected to trail the third-quarter results. Wall Street estimates adjusted EPS of $5.98 on $92.16 billion in revenue.

Bank of America is projected to see Q4 GAAP EPS fall from $0.85 one year ago to $0.61 on Friday. Revenue is also expected to decline $550 million YoY to $23.98 billion. The bank has beaten Wall Street projections for the past five consecutive quarter however. Analysts are much more upbeat about the following two banks than Bank of America, for whom analysts have largely revised their estimates lower.

JPMorgan is likewise expected to see a YoY decline in fourth-quarter GAAP EPS, but revenue consensus of $39.8 billion would mark a $5 billion increase on the top line.

Wells Fargo is also expected to post a dropoff in earnings on Friday. The large lender is slated to deliver GAAP EPS of $0.94. Revenue is expected to rise, however, to $20.37 billion, an upward adjustment from last year’s $19.66 billion.

Wealth manager BlackRock is forecast to report Q4 GAAP EPS of $8.71 on $4.59 billion in revenue. The company is also expected to shed more light on its spot Bitcoin ETF, which is seeking approval from the Securities & Exchange Commission (SEC).

December CPI should light up equity market bulls

The fact that December’s jobs report last Friday came in above consensus at 216K has made investors a bit more sheepish. Obviously, a robust employment market is a good thing for stocks overall, but it makes it less likely that inflation will drop fast enough to ensure a steady bevy of interest rate cuts from the central bank throughout the year.

That is the background thinking heading into Thursday’s CPI release. Core inflation in December is forecast to grow at 0.3% on a monthly basis, while the annual reading should fall from 4% to 3.8%.

Meanwhile, headline annual inflation is expected to tick up from 3.1% to 3.2%. If core inflation for some reason heads in the same direction as the projected headline figure, then expect stocks to reel. However, the more likely scenario based on the Fed’s dovish stance in December is that core inflation continues its long downward trend. In that case, the market should rocket higher. Any data reflecting a less inflationary environment on the monthly figures will also lead the market to rally as traders push forward rate cuts on their 2024 calendars.

 

S&P 500 FAQs

The S&P 500 is a widely followed stock price index which measures the performance of 500 publicly owned companies, and is seen as a broad measure of the US stock market. Each company’s influence on the computation of the index is weighted based on market capitalization. This is calculated by multiplying the number of publicly traded shares of the company by the share price. The S&P 500 index has achieved impressive returns – $1.00 invested in 1970 would have yielded a return of almost $192.00 in 2022. The average annual return since its inception in 1957 has been 11.9%.

Companies are selected by committee, unlike some other indexes where they are included based on set rules. Still, they must meet certain eligibility criteria, the most important of which is market capitalization, which must be greater than or equal to $12.7 billion. Other criteria include liquidity, domicile, public float, sector, financial viability, length of time publicly traded, and representation of the industries in the economy of the United States. The nine largest companies in the index account for 27.8% of the market capitalization of the index.

There are a number of ways to trade the S&P 500. Most retail brokers and spread betting platforms allow traders to use Contracts for Difference (CFD) to place bets on the direction of the price. In addition, that can buy into Index, Mutual and Exchange Traded Funds (ETF) that track the price of the S&P 500. The most liquid of the ETFs is State Street Corporation’s SPY. The Chicago Mercantile Exchange (CME) offers futures contracts in the index and the Chicago Board of Options (CMOE) offers options as well as ETFs, inverse ETFs and leveraged ETFs.

Many different factors drive the S&P 500 but mainly it is the aggregate performance of the component companies revealed in their quarterly and annual company earnings reports. US and global macroeconomic data also contributes as it impacts on investor sentiment, which if positive drives gains. The level of interest rates, set by the Federal Reserve (Fed), also influences the S&P 500 as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.

Earnings of the week

Monday, January 8 – Jefferies Financial Group (JEF)

Tuesday, January 9 – Albertsons Companies (ACI), Tilray Brands (TLRY)

Wednesday, January 10 – KB Home (KBH)

Thursday, January 11 – Infosys (INFY)

Friday, January 12 – UnitedHealth Group (UNH), JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), BlackRock (BLK), Delta Air Lines (DAL), Bank of New York Mellon (BK)

What they said about the market – Principal Financial Group

Principal Financial Group is calling an end to the leadership of the Magnificent 7 in 2024. That would be the seven leading tech or tech-adjacent stocks – Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META), Nvidia (NVDA), Tesla (TSLA) and Microsoft (MSFT) – that led the S&P 500’s performance in 2023, not the principled cowboys led by Yul Brynner. 

The money manager writes that over the past month the equal-weighted S&P 500 (3.6%) has outperformed the market-weighted S&P 500 (2.8%), and they expect this to continue now that investors are discarding their earlier belief in a coming recession.

“Since 10-year U.S. Treasury yields peaked in late October, the equal-weighted S&P 500 has outperformed the Magnificent 7, suggesting investors may no longer need to depend on the strength of these seven giants, and can instead begin to consider the cyclicality of small-cap stocks.”

S&P 500 forecast

The S&P 500 index has revved up on Monday after beginning 2024 with a pullback. Finding its footing near 4,682, it seems likely that bulls will attempt a new all-time high before the month is out, maybe even this week. 

The all-time high, which came on January 4, 2022, sits at 4,818. This feat should be quite easy to achieve, even if the market rally from November and December is winding down.

The 9-day Simple Moving Average (SMA) and its 21-day counterpart are moving closer together. If the shorter-term SMA crosses below the 21-day SMA, then we have ourselves a short-term downtrend. 

Since that is not yet the case, traders should watch the index optimistically for now. The Relative Strength Index (RSI) is no longer overbought, and excitement for Thursday’s CPI print and Friday’s earnings soiree should lead the market higher in the early part of the week.

S&P 500 daily chart
 

Source: https://www.fxstreet.com/news/sp-500-forecast-traders-ready-for-bank-earnings-as-index-approaches-all-time-high-202401082319