Can This Rally Keep Running? Earnings Will Decide

What to Watch for This Week

Last week was another incredibly strong week for the stock market. Investors saw all three major indices make new highs, including the S&P 500 index trading above 5,000 for the first time ever. This all came as last week’s major macro data came in better than expected and Fed members continued to sing a tough tune regarding rate cuts. Additionally, thus far, Q4 earnings season has shaped up nicely with approximately 75% of the S&P 500 companies that have reported posting an upside surprise on EPS. Further upside earnings momentum would be a strong catalyst to extend this current rally by helping to continue broadening the base of outperforming stocks.

This week will bring a fresh lineup of significant macroeconomic data that investors will keep their eyes on. Expected this week are both the new CPI & PPI inflation reports from the Bureau of Labor Statistics. On Friday, the latest consumer sentiment data will be available as the University of Michigan will report their MCSI number for February. These are all important data points that will factor into upcoming Fed meetings. Additionally, Q4 earnings season rolls on this week as we will hear from a number of companies, including a handful that are significant players in the A.I. space, one well-known blue chip consumer packaged goods company, and finally a major agricultural-related industrial company.

CPI – On Tuesday, the BLS will deliver the new CPI (Consumer Price Index) data for the month of January. CPI is a gauge of price inflation at the consumer level. CPI measures the price inflation that consumers are faced with when purchasing goods or services.
- In the previous month’s report, CPI came in hotter than expected, at 3.4% compared to an expectation of 3.2%.

PPI – Following Tuesday’s CPI report, on Friday, we will get the new PPI (Producer Price Index) data from the BLS. PPI is a gauge of wholesaler price inflation. This can be a good indicator of inflation to come as it is measuring the output cost at which producers have sold their goods.
- In the previous month’s report, PPI came in at 1.0%, below the 1.3% expectation.

Consumer Sentiment (MCSI) – Every month the University of Michigan conducts a household survey, and its purpose is to measure the U.S. consumer’s current feelings about the economy and their personal finances. Given that consumer spending makes up about 70% of U.S. GDP, the consumer’s current sentiment is a crucially important tool in forecasting short-term economic trends as consumer sentiment heavily influences spending. This survey is compiled to form an index, the MCSI, which can quantify sentiment trends.
- In January’s report, MCSI saw a significant increase of 13% to 79.0. This increase was a continuation of the current trend during which MCSI rallied off the bottom in mid-2022. Currently, MCSI is at its highest level since early 2021. The Fed and market watchers alike will be tuned into this report.

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Federal Reserve Watch

There were numerous Fed members that spoke at various engagements last week. They all largely reiterated Fed Chair Powell’s message from the previous week. That the FOMC is expecting to lower rates at some point this year, but only once they have seen substantial data and are confident that inflation is definitively remaining below 2%. A few Fed members even went as far as to quantify the number of cuts that they expect this year, saying that they expect between 2-3 policy rate cuts this year.

This week is a relatively quiet week regarding Federal Reserve related events as there are no major speaking events planned and the next FOMC meeting is not until March 19-20.

Following last week’s swathe of Fed speak coupled with Fed Chair Powell’s post-meeting comments, this has greatly moved the Fed Futures markets. The CME Group’s FedWatch Tool now projects an 84.0% probability that the Fed will maintain current policy rates at the upcoming March meeting. This is a slight increase from the previous week when the probability stood at 79.5%. Looking ahead to the next meeting that will occur in May, the CME FedWatch Tool suggests a 60.7% probability that the committee will opt to lower policy rates, a strong decrease when compared to the previous week.

All About the Earnings

The highlights of this coming week’s earnings reports will feature a handful of companies that are deeply involved in the A.I. revolution, including Arista Networks, Inc., Equinix, Inc., & Digital Realty Trust, Inc. In addition to these companies, we will get the Q4 results from blue chip stock, Coca-Cola Company. Finally, the market will get its first look at the fourth quarter earnings for the large-cap industrial, Deere & Company.

This week, there are three companies that are heavily involved in the A.I. revolution that will post their Q4 results. Up first is Arista Networks, Inc., who will post their earnings after the close on Monday. Next, are two REIT’s that own and manage data centers which house the computing hardware to power A.I. technology. Equinix, Inc. & Digital Realty Trust, Inc. will report their fourth quarter earnings after the closing bell on Wednesday & Thursday respectively.
- ANET earnings are expected to come in at $1.52 EPS.
- EQIX earnings are expected to come in at $6.26 EPS.
- DLR earnings are expected to come in at $1.64 EPS.

On Tuesday, prior to the opening bell, Coca-Cola Company is expected to report their latest quarterly earnings. Expectations are that KO’s fourth quarter earnings will grow by 8.9% compared to Q4 of 2022. Additionally, KO is forecasted to grow full-year earnings by about 8.5% over last year’s number.
- KO earnings are expected to come in at $0.49 EPS.

To close out this upcoming week’s earnings excitement, a major industrial name, Deere & Company is on deck to report their Q4 earnings prior to the market open on Thursday. DE is expected to post Q4 EPS that will be 20.7% lower when compared to the same quarter the previous year.
- DE earnings are expected to come in at $5.19 EPS.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,

Blane Markham

Author, Weekly Market Periscope

Hughes Optioneering Team

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Can This Rally Keep Running? Earnings Will Decide

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