"Terrifying data" accompanied by the earnings reports of investment banking giants! Can the US stock market continue to play music and dance?

After ending a nine-week streak of gains, the US stock market seemed to return to an upward trajectory last week. In the first full trading week of the year, all three major US stock indexes saw gains. The NASDAQ Composite Index, which includes many technology stocks, had the largest increase, reaching 3%. The S&P 500, the benchmark index, closed the week less than 13 points away from its all-time high, representing a potential increase of about 0.3%. This week, Microsoft (MSFT.US) briefly surpassed Apple (AAPL.US) in market value, earning the title of "the world's most valuable company."

In the eyes of the bulls in the US stock market, investors will seek to maintain this bullish momentum in the shortened holiday week ahead. The US stock market was closed on Monday for Martin Luther King Jr. Day, and the Q4 earnings season officially kicked off last Friday. The performance data of two Wall Street giants, Goldman Sachs (GS.US) and Morgan Stanley (MS.US), as well as the retail sales data, which will be released on Wednesday and is known as "terrifying data," are expected to be the main catalysts for the US stock market.

The retail sales data is considered "terrifying" because it plays a crucial role in investors' assessment of the current and future state of the US economy. As approximately 70% of the US GDP is driven by consumer spending, this data has significant implications. Its release often leads to significant volatility in financial markets, including the stock market.

Due to continued consumer-driven economic expansion in the US, retail sales in December are expected to increase by 0.4%, slightly higher than the 0.3% growth in November. This is expected to further confirm the "soft landing" trend reflected in recent economic data. Recent non-farm payroll and initial jobless claims data suggest that the US labor market remains resilient, leading the market to believe that the Federal Reserve can combat inflation without harming the US job market. This is the core of the "soft landing" scenario.

Data shows that the US labor market continues to grow strongly in a high-interest-rate environment. Seasonally adjusted non-farm employment in the US increased by 216,000 in December, reaching a new high since September 2023. This exceeded expectations of 170,000 and the revised previous value of 173,000. The US unemployment rate in December was 3.7%, lower than the market expectation of 3.8% and consistent with the previous month. Economist Michael Gapen from Bank of America predicts that December data will be boosted by seasonal factors such as holiday shopping, resulting in optimistic retail sales figures and bolstering expectations of a "soft landing" for the US economy.

Gapen adds, "Taking a step back, we believe that overall spending, while not showing signs of a surge, will be healthy." Currently, Bank of America expects the annualized growth rate of GDP in the fourth quarter to reach 1.2%.

In terms of other economic data, investors should closely monitor the initial jobless claims data to be released on Thursday and the University of Michigan Consumer Sentiment Index to be released on Friday, as these indicators largely reflect the labor market situation and consumer expectations for the future.

Apart from earnings reports and economic schedules, the party caucus meeting in Iowa on Monday will mark the official start of the 2024 US presidential election. In terms of geopolitics, the escalating tension in the Red Sea region - with the US and its allies launching airstrikes in Yemen for several consecutive days last week - has led to catalysts for rising oil prices and maritime freight prices, attracting increasing attention from investors.

Wall Street investment banking giants Goldman Sachs (GS.US) and Morgan Stanley (MS.US) are expected to release their Q4 earnings reports on Tuesday morning Eastern Time. After a year of challenging trading and various obstacles, their financial reports will reveal the strongest situation and future trends of investment banking business. Currently, analysts are optimistic about the prospects of US investment banks, with expectations of a comprehensive recovery in global IPOs and large-scale mergers and acquisitions in 2024.

Ken Leon, research director at CFRA, said last Friday, "I think the news from the investment banking giants next week will once again show that we hit the bottom of the cycle last year."

Last Friday, Wall Street commercial banking giants JPMorgan Chase (JPM.US), Wells Fargo (WFC.US), Bank of America (BAC.US), and Citigroup (C.US) announced their Q4 and annual earnings, officially kicking off the US earnings season. Among them, JPMorgan Chase's annual profit of nearly $50 billion reached a historic high, while Citigroup plans to lay off 20,000 employees and further reduce costs by $2.5 billion.

Compared to JPMorgan Chase, the performance of other Wall Street commercial banking giants was lackluster. For example, Bank of America, the second-largest bank in the US, reported Q4 earnings that fell short of analysts' expectations, mainly due to several expenses in the fourth quarter reducing profits, and an unexpected decline in revenue from fixed-income trading. Bank of America's Q4 net profit plummeted by 56% to $3.14 billion, twice the decline of 28% predicted by analysts.

Citigroup (C.US) reported a Q4 loss of approximately $1.8 billion, or a loss of $1.16 per share, far below analysts' expected earnings per share of $0.11. In comparison, earnings per share in the previous quarter were as high as $1.63, and in the same period last year, it was $1.16 per share. This includes some one-time projects, with $780 million in expenses related to severance pay provided by the bank to employees affected by the restructuring.

Delta Air Lines (DAL.US) kicked off the performance of the aviation industry, but the fourth-quarter performance of Delta Air Lines was extremely disappointing to investors, causing the company's stock price to fall nearly 9% and significantly dragging down the stock prices of its peers, United Airlines (UAL.US) and American Airlines (AAL.US).

Last week, inflation signals were mixed, but expectations of interest rate cuts unexpectedly heated up.

Inflation data released last week showed that the December Consumer Price Index (CPI) exceeded economists' expectations, while shortly thereafter, the Producer Price Index (PPI) fell more than expected.

Nancy Vanden Houten, Chief U.S. Economist at Oxford Economics, pointed out in a client report last Friday that the disruption trend related to the Red Sea shipping crisis has brought "upside risks" to inflation forecasts.

As the market focuses on how each basis point increment in inflation data may change market expectations for the Federal Reserve's aggressive interest rate cuts (expectations of up to 150 basis points), the unexpectedly weak PPI data released last week has led people to slightly believe that the Fed will begin cutting interest rates in March.

CME Group's "FedWatch Tool" shows that the interest rate futures market continues to bet on an aggressive rate cut cycle, with the probability of a 0.25% rate cut by the Fed in March reaching as high as 77% after the PPI release. On the eve of the PPI release, following the CPI release, this probability reached nearly 50%.

Economists at Barclays, led by Jonathan Millar, wrote last Friday: "We have adjusted our baseline assumption, assuming that the Fed's FOMC will begin gradually cutting interest rates every other meeting starting in March, two meetings earlier than previously expected. He added, "This mainly reflects our downward revision of the core PCE data expectations. The continued weak PCE data greatly increases the possibility that the FOMC will continue to see relatively weak monthly data from this indicator until February." Nevertheless, we believe that the results in March are closer to the 80% probability priced in by the market."

Barclays economists also believe that the pace of interest rate development may be "much slower" than market expectations. Miller and his team expect rates to fall by 1% by the end of 2024, while the market expects a rate cut of around 1.5%. The current federal funds rate is in the range of 5.25%-5.50%.

The market is still closely watching earnings reports, especially those of the "Big Seven Tech Giants" later on.

The financial industry has become the focal point of the start of the US stock market earnings season. However, in 2023, the big news in the market is focused on the technology sector, especially the "Big Seven Tech Giants" that have driven the Nasdaq index up by over 40%. Later this month, the earnings reports of these tech giants will be released one after another, directly impacting the direction of the US stock market.

With the upcoming profit cycle driven by new artificial intelligence technology, the valuation of the technology sector has soared. Investors are increasingly interested in this sector and have profit expectations for the AI-related businesses of these tech companies, rather than just chanting the "AI slogan" verbally.

As of the end of 2023, according to Bank of America statistics, the overall expected P/E ratio of the US stock market technology sector is 27x, ranking second among all S&P 500 sectors, second only to the real estate sector (XLRE.US), which has a higher valuation (39x) mainly due to a significant decline in overall profits in that sector, leading to an increase in valuation. The overall P/E ratio of the S&P 500 index is 19.8x.

Since all technology stocks account for more than 28% of the market value of the S&P 500 index, the earnings reports of the "Big Seven Tech Giants" and other heavyweight tech companies will have a huge impact on the overall trend of the index.

Global investors' extremely optimistic sentiment towards artificial intelligence (AI) has completely overwhelmed concerns about the impact of the Fed's interest rate hikes in 2023. With global companies actively deploying AI trends, investors have high expectations for the technology industry. This AI boom has directly driven the cumulative triple-digit gains of the "Big Seven Tech Giants" in 2023. Among the 25% increase in the benchmark S&P 500 index in 2023, the contributions of the "Big Seven Tech Giants" accounted for about two-thirds.

In a report released last Friday, FactSet analyst John Butters emphasized that S&P 500 index constituent companies have slightly higher negative expectations for fourth-quarter performance than the average levels of the past 5 and 10 years. 111 constituent companies have issued warnings about upcoming earnings. When it comes to these warnings, the technology industry stands out.

According to FactSet data, 25 technology companies have issued warnings that their fourth-quarter earnings will be lower than expected, surpassing the 10-year average of 19 companies issuing similar warnings. In total, there are 64 S&P 500 index component companies in this industry.

Now, when it comes to the names of the "Big Seven Tech Giants," the subtle classification differences at the industry level pose a major challenge. Meta Platforms (META.US), the parent company of Facebook, and Alphabet (GOOGL.US), the parent company of Google, are part of the Communication Services (XLC.US) industry, while Amazon (AMZN.US) and Tesla (TSLA.US) are classified under the Consumer Discretionary (XLY.US) industry.

However, all of these stocks, especially the technology component stocks in the S&P 500 index, are also components of the Nasdaq index, which is considered a barometer of investor sentiment and an important indicator of global investor risk appetite.

Last year, the "Big Seven Tech Giants" held significant positions in the minds of many investors. Therefore, as the earnings reports of these companies begin to roll in, the fourth-quarter earnings season may truly begin in earnest.