Powell and CPI Will Drive Equities, Not Earnings

Federal Reserve Chairman Jerome Powell

Stocks rose modestly this morning as bulls switched their focus to second-quarter earnings, due out this week. Two big banks – JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS) – are set to report before the market opens tomorrow. This could help lift ailing financial stocks that plunged from their recent highs, driven lower by a flattening yield curve.

Over the last two trading sessions, however, long-term Treasury yields are up. That’s contributed to a snap-back bank stock recovery.

And if bank shareholders like what they hear prior to tomorrow’s open, a full-fledged financial sector rally could soon follow. The same goes for the general market should other major corporations impress.

But the focus won’t necessarily be on last quarter’s revenues. Everyone’s expecting a slew of major earnings “beats.”

Forward guidance, or what companies believe is coming for the second half, is what could truly make or break sentiment according to many strategists.

“I think investors want to take a wait and see approach. Most investors are expecting blockbuster earnings results and these will likely be peak earnings results,” explained Jack Ablin, chief investment officer at Cresset Wealth Advisors.

“The most important element of these reports this week will be the outlook discussion from management and not necessarily the numbers of the last three months.”

Analysts predict that Q2 earnings will come in 64% higher than last year. If corporations meet that expectation, they’ll hit their fastest growth rate since 2009 following the Financial Crisis.

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Wall Street fully believes this would put value stocks back into control after several weeks of growth (namely tech) stock dominance.

“Continued earnings momentum should refuel investors’ confidence in the recovery amid slowdown concerns and drive a rotation back into Value,” said Bank of America’s Savita Subramanian in a note.

Bleakley Advisory Group chief investment officer Peter Boockvar, meanwhile, thinks earnings will take a backseat to Fed Chairman Jerome Powell’s testimony before Congress on Wednesday and Thursday as well as an important Consumer Price Index (CPI) print.

“The market today is in a rest mode ahead of the CPI number tomorrow and Powell’s testimony,” Boockvar remarked.

“While earnings of course are going to be important, most of the earnings really don’t come out until next week and the week after. So while we’ll focus on what the banks have to say […] right now, it’s all about CPI tomorrow, it’s all about what Powell says and if he hints to the taper sooner rather than later.”

He’s absolutely right. Corporate earnings haven’t really driven the post-Covid rally. The Fed’s almost solely responsible. Low rates, mass liquidity, and assurances that inflation is transitory (hint: it’s not) have kept share prices rising.

So, while much will be made about the JPM and GS earnings tomorrow, Powell’s going to be the one to watch along with the market’s reaction to what should be another blockbuster CPI reading.

Will either Powell or CPI shock stocks into a sell-off? They certainly could. But if they do, expect another bout of rampant dip-buying. Bulls haven’t let the market endure any sort of short-term correction just yet. A worse-than-expected CPI print or hawkish Powell are unlikely to change that.

Even if, on a fundamental level, some momentary profit-taking makes perfect sense.

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