Dow Jones, Nasdaq, S&P 500 weekly preview: January CPI report takes the central stage

  • Stock Market News
Dow Jones, Nasdaq, S&P 500 weekly preview: January CPI report takes the central stage
Credit: © Reuters.

The S&P 500 rose 1.4% last week to deliver its first ever weekly close above the 5000 handle. Stocks managed to navigate through a barrage of commentary from Federal Reserve officials, which predominantly emphasized the ongoing need for disinflation before any potential interest rate reductions.

The Dow Jones Industrial Average (DJI) ended the week flat after the bulls managed to erase intraweek losses. The Nasdaq Composite Index (IXIC) surged 2.3% to close in on a new record high above the 16000 mark.

Despite initial hopes, the likelihood of a rate cut in March has diminished, with the market consensus now shifting towards a possible cut no sooner than May. Furthermore, the Federal Reserve's projections continue to suggest the possibility of just three rate cuts in 2024.

Economic indicators released last week provided a mixed picture. Updates to the Purchasing Managers’ Index (PMI) for services sectors highlighted a robust economy, while figures for jobless claims suggested a strong, albeit decelerating, labor market.

Moreover, a decrease in consumer credit hinted at a decline in borrowing. The week was also marked by significant earnings announcements, adding another layer of complexity to market dynamics.

As we look to the week ahead, key economic data releases will likely play a pivotal role in shaping market movements. The Consumer Price Index (CPI) inflation data for January is due tomorrow and is a highly anticipated event as it could significantly influence the Federal Reserve's monetary policy decisions and, consequently, investor sentiment.

“The January Consumer Price Index (CPI) report should show ongoing progress on inflation. We forecast headline and core CPI rose by 0.2% m/m (0.16% unrounded) and 0.3% (0.29% unrounded) respectively,” Bank of America economists wrote in a preview note.

“As a result, y/y headline inflation should print fivetenths lower at 2.9%, and core should print one-tenth lower at 3.8%. Additionally, our forecast implies a headline NSA index of 307.961 compared to 306.746 in December.”

Moreover, updates on consumer sentiment, retail sales, and the housing market are expected to provide further insights into the health of the U.S. economy.

Earnings season continues

As of Friday, two-thirds (67%) of S&P 500 companies reported their Q4 2023 results. A 75% of these companies have beaten earnings per share (EPS) expectations, while 65% have surpassed revenue forecasts, according to FactSet.

RBC’s Lori Calvasina says the gap between EPS beats and revenue beats “ is wide but not unprecedented.” The blended earnings growth rate for the S&P 500 stands at 2.9% for Q4 2023.

“If 2.9% is the actual growth rate for the quarter, it will mark the second-straight quarter that the index has reported earnings growth,” analysts at FactSet said.

However, the outlook for Q1 2024 suggests caution among S&P 500 companies, with 52 issuing negative EPS guidance compared to 21 providing a positive outlook. From a valuation standpoint, the forward 12-month P/E ratio for the S&P 500 is currently at 20.3. This valuation is elevated compared to historical standards, sitting above both the 5-year and 10-year averages of 18.9 and 17.7, respectively.

The key reporters this week include Arista Networks (NYSE: ANET ), Coca-Cola (NYSE: KO ), Shopify (NYSE: SHOP ), Airbnb (ABNB), Cisco Systems (NASDAQ: CSCO ), Sony (NYSE: SONY ), Applied Materials (NASDAQ: AMAT ), Deere (NYSE: DE ), Stellantis (NYSE: STLA ), etc.

What analysts are saying about US stocks

Analysts at Evercore ISI: “The Foundations of FOMO are forming – similarities to Y2K emerging in Macro and Micro. Momentum supercharged by GenAI, Goldilocks, bullish positioning and stocks up/volatility up dynamic. Remain invested Defensively. Valuations can run further yet, momentum markets end without warning. Headwinds to Goldilocks and weak forward returns from high PEs skew Risk over reward.”

RBC’s Lori Calvasina: “Small Cap companies posting earnings beats have been slight underperformers. Companies missing consensus EPS forecasts are underperforming to a lesser degree than usual, but trends here are worse than the last quarter.”

Analysts at UBS: “The good earnings season enhances the favorable backdrop which is supported by healthy economic growth, moderating inflation, a Fed pivoting to rate cuts, and tremendous demand for AI infrastructure. This suggests that the environment is trending toward our upside scenario for which we have a year-end S&P 500 price target of 5,300. Still, the S&P 500 forward P/E is approaching 20.5x, and we would wait for better entry points before adding to positions.”

Analysts at BTIG: “We are likely nearing an inflection in momentum, where high-momentum falls, low-momentum rallys, or both. CPI this week could be a catalyst for the unwind. While a momentum unwind is generally a factor or style occurrence, it should also benefit small-caps broadly which have clearly lagged. We would also reiterate our thoughts from last Thursday regarding the often overlooked mid-caps, which are very close to breaking out and testing their all-time highs from 2021.”

Analysts at Morgan Stanley: “Balance sheet quality and operational efficiency come back into focus. We reiterate our constructive stance on high quality growth, which is showing relative strength from a fundamental and performance standpoint.”

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