David M. Reimer

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Stocks appear poised for a mixed open to today’s trading. An escalation in the conflict between Israel and Iran is weighing a bit on the market. No significant macroeconomic news is scheduled for release today. That said, a new earnings season has begun, and investors are watching closely for indications of where general business activity is headed. Most visibly, prior to the bell, financial services heavyweight American Express (AXP), consumer products giant Procter & Gamble (PG), oilfield services sector leader Schlumberger (SLB), and regional banks Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), and Regions Financial (RF) all released quarterly results. Investors are digesting the news and deciding what trades to make. Also, this morning, it’s worth noting that Chicago Federal Reserve President Austan Goolsbee will be speaking on the economy and central bank policy at a conference in the windy city.

The major domestic stock market indexes had a nice run in the first quarter of this year, building on last year’s gains. Share prices largely peaked at the end of March. So far in the current quarter, however, valuations have been under pressure. That includes the current week. Stronger-than-expected economic expansion and higher-than-anticipated growth in inflation have led economists and Wall Street analysts to pare back their forecasts for the number of short-term interest-rate cuts, on the part of the Federal Reserve, in 2024. As those closely monitoring the economy probably well know, at the start of this year, the consensus outlook was for six or seven one-quarter-basis-point reductions in the federal funds rate, now 5.25%-5.50%, starting this June. That outlook has become more conservative with various experts anticipating one, two, or even no cuts to rates in the second half. We do expect lower rates by the year’s close.

Economic data continues to stream in, including corporate earnings, and the Fed is watching. Estimates for this year’s gross domestic product have increased. So far, earnings have come in at fairly decent levels, but company managers are being cautious about business prospects, given the stress from higher interest rates on end-markets. Earnings misses, rather than beats, will probably move share prices in the bigger way. It’s also important for investors to note that the employment situation remains favorable. There are more job openings than applicants, though highly skilled workers are in short supply, even with immigration recovering. Wage inflation has not been a major concern, but it seems that organized labor has become more active in bargaining for better benefits, lately.

This coming week, new information will be released on the services and manufacturing sectors (courtesy of Standard & Poor’s), durable goods orders, business inventories, gross domestic product, jobless claims, new home and pending home sales, and consumer sentiment. Most importantly, the government will report on the Personal Consumption Expenditures (PCE) index, a key inflation measure for the Fed, as well as personal income and spending levels. It’s likely that only a big deviation in the PCE from what the Street expects will move the stock market in a substantial up or down manner. Apparently, favorable progress on the inflation front has been held up by resilient reported growth in the cost of housing.

In recent weeks, uncertainty surrounding the macroeconomy and geopolitics has weighed down share prices, most visibly those of bank, semiconductor, and software companies, small capitalization stocks in particular. Overall price volatility has increased. In such an environment, investors would do well to stay with leading companies having proven earnings and cash-flow track records. – David M. Reimer

At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.