Stocks climbed slightly higher through noon after opening lower this morning. Intraday sentiment flip-flops have become the norm over the last week, as have muted trading sessions. Today was no different with a critical Consumer Price Index (CPI) reading due out this Thursday.
Mixed quarterly results from America’s top corporations certainly didn’t build any “breakout momentum,” either. Pfizer (NYSE: PFE) reported earnings, missing estimates while providing disappointing forward guidance. PFE shares fell in response.
Overall, though, it’s been a better-than-expected earnings season. Roughly 77% of 300 S&P companies that reported exceeded estimates. But thus far, forward guidance has left many shareholders feeling uneasy about the future.
“Despite a solid beat this quarter, guidance weakened significantly. […] Guidance is also sparser than usual – we note only 76 instances of [earnings per share] guidance issuance in [January], slightly below last Jan and the lowest of any Jan,” wrote Bank of America’s Savita Subramanian in a note.
With many companies now thinking that a significant slowdown is on its way, bulls have lost much of their initial February enthusiasm.
It’s something Wall Street hinted at over the last few weeks; the idea that the US economy is on a path toward slowed growth, if not a full economic contraction. This outlook could worsen if the next batch of inflation data proves to be hotter than expected.
“The tumultuous market action continues as the combination of Fed policy uncertainty and economic transition remains in focus,” said Canaccord Genuity analysts.
“Unfortunately, this is the environment we are going to be in for a while as the monetary and economic mid-cycle transition unfolds.”
Oanda strategist Edward Moya expanded on the topic of inflation, adding that the market’s recent bout of choppiness could easily persist until Thursday’s CPI release.
“US stocks will struggle for direction until the latest inflation tilts market’s expectations as to how aggressive the Fed will tighten into what is still deemed as an overvalued stock market,” Moya said.
Historically, the first rate hike in a tightening cycle has usually been met with an equity correction. If that’s the case this time around, stocks should fall through the second half of March.
In addition, this has typically been a good dip-buying opportunity. But in 2022, economic expectations are far worse than they were during the last few tightening cycles. That could mean the first rate hike-driven selloff may only intensify as the year progresses and more hikes arrive.
“We consequently see the announced combination of tapering, hiking and balance-sheet reduction in the same year as too risky for financial markets,” Guilhem Savry, Unigestion’s head of macro and dynamic allocation.
“The risks for US growth are greater than highlighted by the Fed, and we see little room for a strong upside in risky assets.”
Other analysts disagree.
“Markets will get used to the tightening regime at some point,” explained AXA Investment Managers chief investment officer Chris Iggo.
“The growth and earnings forecast revisions in the next few months will be key.”
So, as has been the case since last Thursday, the market remains split on what’s going to happen when Fed Chairman Jerome Powell finally announces the first rate hike. There’s always a chance that he “chickens out,” of course. And our own hypothesis suggests we’ll see a few rate hikes followed by a rate reduction in response to a major equity slump, similar to what happened in 2018.
Everyone has their own theory, and for that reason, stocks may not move in a deliberate manner until March arrives. Inflation reports, like the Producer Price Index (PPI) and aforementioned CPI, could certainly tip the needle one way or the other, but the market’s moderate-term destiny lies in the hands of Powell, who isn’t set to speak (and potentially reveal a rate a hike) until after the March FOMC meeting on the 16th.