Traders avoid taking risks, as Federal Reserve officials sounded hawkish in their public appearances and the next earnings season lurks in the corner later this week.
Three Fed officials (Michael Barr, Mary Daly and Loretta Mester) insisted that there will be more rate hikes this year to bring inflation down to its 2% target.
But Wall Street already expects hawkish sentiment.
The biggest catalyst could be when big banks kick off the earnings season this Friday.
JPMorgan Chase, Citigroup and Wells Fargo are all due to report.
Morgan Stanley’s Michael Wilson said, “earnings forecasts will carry heavier weight this time because of the higher valuations in the high-interest-rate environment, along with shrinking liquidity as banks pull back on lending”.
“Many risks still lie ahead,” said Seema Shah, chief global strategist at Principal Asset Management. “Core inflation is stubbornly above policy target, requiring further Fed tightening. Additionally, with broad equity valuations having once again become stretched and market breadth extremely narrow, the market is priced for perfection, leaving it vulnerable to earnings disappointments.”
In other words, the expectations are high.
There may not be room to rally if earnings are slightly better than expected. But what if they disappoint?
Analysts already cut earnings estimates in recent weeks, giving companies an easier time to deliver stronger-than-expected results.
So, these beats could very well play into Wall Street’s optimism.
“We are cautious about the self-fulfilling optimism driven by these diminished expectations,” Malik noted. “Additionally, we’re mindful of mixed US economic data and the potential for two more rate hikes this year.”
As a reminder, we will receive a new inflation reading this Wednesday.
Initial jobless claims are due on Thursday, while University of Michigan consumer sentiment and banks kicking off earnings will happen on Friday.