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What you need to know this week

Posted on by darion

Investors will be pleased with inflation and the start of second-quarter earnings reports, after a week in which the holiday season shortened and stocks closed near record highs.

Amid the slowdown in job growth, investors will be closely watching the release of the June Consumer Price Index (CPI) on Thursday as indications grow that the Federal Reserve could cut interest rates in September. Federal Reserve Chairman Jerome Powell’s semiannual testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday will also be a key focus for investors.

On the corporate side, some of the largest U.S. financial institutions, including JPMorgan (JPM), Wells Fargo (WFC) and Citi (C), will kick off the second-quarter earnings season on Friday morning. PepsiCo (PEP) and Delta Air Lines (DAL) will also be in the spotlight early in the week.

Last week, the S&P 500 (^GSPC) rose nearly 2%, while the Nasdaq Composite (^IXIC) rose more than 3%. Both closed the week at record highs. The Dow Jones Industrial Average (^DJI), which has been a noticeable laggard all year, rose a more modest 0.5%.

Friday’s June jobs report showed the U.S. economy added more jobs than expected last month. But economists found few signs of a labor market slowdown in the report’s details.

The unemployment rate rose to 4.1%, the highest level since November 2021. Meanwhile, job growth data for April and May was revised down by 111,000, showing that the solid growth in the labor market in recent months was not as solid as initially thought.

Many economists believe these numbers will prompt the Federal Reserve to cut interest rates in September.

“The June employment report showed more signs of a cooling labor market, with weaker-than-expected job growth, including revisions, rising unemployment and a slowdown in earnings growth,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, wrote in a note to clients.

“Federal Reserve officials are increasingly focused on downside risks in the labor market, and the June data support our forecast that the Fed will cut interest rates in September and at each meeting thereafter.”

Neil Dutta, head of economics at Renaissance Macro, wrote in a note to clients on Friday that the report “should confirm expectations for a rate cut in September.”

“Economic conditions are cooling, which is causing the Fed to have to make a variety of decisions,” Dutta added. “Powell should use July to push for a rate cut in September.”

Investors on Friday expected the Federal Reserve to cut interest rates by about 75% ahead of its September meeting, down from a 64% cut a week earlier, according to CME’s FedWatch Tool.

With Powell set to deliver his semi-annual testimony on Capitol Hill this week, investors will be closely watching any signs of policy changes ahead of the July 30-31 meeting.

Read more: What the Fed’s interest rate decision means for bank accounts, deposits, loans and credit cards

While the slowdown in the labor market strengthens the case for the Federal Reserve to cut interest rates, inflation remains a significant factor.

Inflation data from May showed prices rose at their slowest pace in 2024. Powell noted last week that the data “suggest we are returning to a disinflationary path.”

The first test of whether this path will continue will be the release of the June CPI report on Thursday morning.

Wall Street economists expect core inflation to have risen just 3.1% year over year in June, a slowdown from a 3.3% gain in May. The May data was the slowest annual inflation reading since July 2022. Prices are expected to rise 0.1% month over month, down slightly from a flat reading in May.

On a “core” basis that excludes food and energy prices, CPI is forecast to rise 3.4% in June from a year ago, unchanged from May. Month-on-month increases in core prices are forecast to be 0.2%.

“We expect the June CPI report to be another confidence-boosting report, following the undoubtedly strong report in May,” Stephen Juneau, U.S. economist at Bank of America, wrote in a research note ahead of the release.

Read more: Inflation fever breaking through? Price hikes on everyday expenses are finally slowing down.

Earnings season is upon us again, and in the coming weeks, the spotlight will be on the Financials sector (XLF). According to FactSet, 40% of the S&P 500 companies that report earnings this time of year will come from this sector.

The sector is not expected to lead earnings growth this quarter, as analysts are forecasting a 4.3% annualized earnings growth rate for Q2. That puts the financials sector seventh out of 11 sectors in the S&P 500 in terms of earnings growth.

As Yahoo Finance’s David Hollerith recently reported, regional banks continue to pose a significant problem for the sector. Regional banks are expected to report a 26 percent decline in year-over-year profit growth.

NEW YORK, NEW YORK - MAY 26: The JPMorgan Chase logo is seen at its headquarters May 26, 2023 in New York. JPMorgan Chase Chief Executive Jamie Dimon testifies under oath in two civil lawsuits that accuse the bank of ignoring warnings that Jeffrey Epstein trafficked teenage girls for sex while profiting from his association. The lawsuits were filed late last year in federal court by lawyers representing Epstein's victims and another by the government of the U.S. Virgin Islands. Epstein committed suicide three years ago while in federal custody on sex trafficking charges. The bank says he was fired as a client decades ago. (Photo by Michael M. Santiago/Getty Images)

The JPMorgan Chase logo is seen at the bank’s headquarters in New York, May 26, 2023. (Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)

After emerging from an earnings recession in 2023, companies finally face a new challenge this reporting season: setting the bar high.

The consensus forecast for S&P 500 earnings in the second quarter is 8.8% from a year earlier, according to FactSet. That would be the fastest year-over-year earnings growth for the index since the first quarter of 2022.

“We expect the magnitude of earnings per share overachievement to moderate as consensus forecasts raise the bar higher than in prior quarters,” David Kostin, chief U.S. equities strategist at Goldman Sachs, wrote in a note to clients ahead of earnings season.

With markets hitting record highs during this reporting period, Kostin and other strategists are cautious about what returns investors can expect if results beat Wall Street expectations.

Kostin noted that stocks that beat expectations in the previous quarter outperformed the S&P 500 by 3 basis points on the next trading day. That’s well below the historical average of 100 basis points.

Given that investor sentiment remains positive ahead of this round of earnings, Kostin said the “reward for exceeding expectations should be lower than average this quarter, although not as extreme as in Q1.”

Scott Chronert, equity strategist at Citi US, echoed this sentiment, warning that given the “high expectations for implied growth,” the chances for big price gains this quarter are limited.

“Markets likely need a rally combined with solid execution to sustain recent gains or push them higher,” Chronert wrote in a weekly research note on Friday. “We are concerned that while fundamentals are positive and consensus estimates are reachable, valuations suggest the buy side will demand more.”

Broadly speaking, this is affecting Wall Street’s expectations about how much stronger second-quarter earnings reports might impact the stock market.

Research from Binky Chadha, chief equity strategist at Deutsche Bank, shows that the S&P 500 rises 80% of the time during earnings season, with an average return of 2%.

“On the other hand,” Chadha noted, “the market rally during earnings season and the overweight position in equities point to a moderate rally.”

Economic data:New York Federal Reserve 1-Year Inflation Expectations, June (3.17% previously)

Merits: No significant profit data.

Economic data:NFIB Small Business Optimism, June (expect. 89.9, previously 90.5); Federal Reserve Chairman Powell testifies before the Senate Banking Committee.

Merits: Helen of Troy (FULL)

Economic data:MBA Mortgage Applications July 5 (-2.6% earlier), Wholesale Inventories Month-over-Month End of May (0.6% earlier); Fed Chairman Powell Testifies Before House Financial Services Committee

Merits:Manchester United (MANU), WD-40 (WDFC), PriceSmart (PSMT)

Economic data: Consumer Price Index, month-on-month, June (expected +0.1%, previously +0%); CPI excluding food and energy, month-on-month, June (expected +0.2%, previously +0.2%); Consumer Price Index, year-on-year, June (expected +3.1%, previously +3.3%); CPI excluding food and energy, year-on-year, June (expected +3.4%, previously +3.4%); Real average hourly earnings, year-on-year, June (+0.7% previously); Real average weekly earnings, year-on-year, June (+0.5% previously); First claims for jobless benefits, week ending July 6 (238,000 previously);

Merits:Brands Conagra (CAG), Delta Air Lines (DAL), PepsiCo (PEP), Progressive (PGR)

Economic data: Producer Price Index, month-on-month, June (expected +0.1%, previously -0.2%); PPI, year-on-year, June (previous +2.2%); Core PPI, month-on-month, June (expected +0.1%, previously 0%); Core PPI, year-on-year, June (previous +2.3%); University of Michigan Consumer Confidence, July, preliminary (expected 67, previously 68.2)

Merits:BNY Mellon (BK), JPMorgan (JPM), Citigroup (C), Wells Fargo (WFC)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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