Outlook for US Stocks this Week: How will the earnings season be affected by the blocked rate cut expectations in the market?

According to the VESYNC financial APP, last week, as inflation concerns continued to affect market sentiment, global stock markets generally declined. The Nasdaq fell by nearly 0.6%, the S&P 500 fell by over 1.6%, and the Dow Jones Industrial Average fell by nearly 2.5%. Bank stocks plummeted significantly after last Friday's earnings reports, becoming a major drag on the market.

In the new week, investors will receive more updates on the condition of US companies. Large banks such as Bank of America (BAC.US), Goldman Sachs (GS.US), and Morgan Stanley (MS.US) will successively release their earnings reports, while United Airlines (UAL.US) and Netflix (NFLX.US) earnings reports are also highly anticipated. These reports will provide more clues about the economy and corporate conditions to the market.

In terms of economic data, US retail sales data for March will be released on Monday, which will be the only important economic data release this week.

Rate Cut Expectations Dim

In terms of consumer confidence, the market will closely watch the upcoming March retail sales data as an important indicator to assess the resilience of US consumers. Wells Fargo's economic team pointed out that despite facing multiple challenges, they believe that consumer spending will not significantly slow down, especially with wage growth remaining robust. The market generally expects a 0.4% month-on-month increase in US March retail sales, continuing the rebound trend from February.

However, hopes for a rate cut by the Federal Reserve in June are gradually fading. Last week's job market data exceeded expectations, and the latest inflation data showed that the pace of price increases did not slow down as quickly as expected, leading many economists to now believe that the Fed will not start cutting rates until at least the fall. In addition, according to the latest forecasts from Bank of America and Deutsche Bank, the Fed may postpone the first rate cut until December.

Michael Gapen, an economist at Bank of America, pointed out in a research report that they no longer believe policymakers will have enough confidence to start cutting rates in the near term. They expect short-term inflation to remain relatively stable, with a predicted core PCE inflation rate of 0.25% for March and AprilIn addition, Bloomberg data shows that the market consensus currently expects two interest rate cuts this year. However, Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, believes that even this more moderate expectation may not materialize until 2024. He warned that further disappointing inflation data or fiscal stimulus resulting from election outcomes, trade or immigration policies that could push up inflation, may prevent rate cuts from happening this year or even in 2025.

Continued Focus on Financial Performance

As for the banking sector, the first batch of bank stock earnings reports last week showed that despite overall healthy fundamentals, several of the largest U.S. financial institutions such as JPMorgan Chase, Wells Fargo, and Citigroup all reported a decline in net interest income. These results did not instill much confidence in investors, coupled with high expectations for a "perfect scenario" in the market, meaning that even good news could bring downside risks.

Scott Chronert, U.S. stock strategist at Citigroup, also pointed out that the market has already priced in a higher likelihood of a "Goldilocks scenario" (an ideal state of moderate economic growth and inflation) occurring this year, which means that market expectations for corporate performance are very high. Therefore, even slightly disappointing reports could lead to negative reactions, despite the companies' underlying operational conditions possibly remaining robust.

Next, more banks including Goldman Sachs, Bank of America, and Morgan Stanley will release earnings reports early this week, with investors continuing to focus on the impact on the financial services sector in a high-interest rate environment.

Conclusion

Against the backdrop of concerns that the downward path of inflation may have stalled and worries that the Fed may cut rates less than expected, the performance of this earnings season will be crucial for a market rebound.

As corporate quarterly updates enter a full swing, analysts will be watching how companies drive profit growth through specific measures. In the long run, market performance will largely depend on whether these earnings data can support current signs of economic recovery and provide support for future market trends.

According to FactSet data, S&P 500 index earnings for the first quarter are expected to grow by 3.4%, below the 10-year average of 5.1%.