Wall Street Indices Bounce Back on Renewed Buying: Wall Street indices experienced a notable recovery
following a new wave of stock purchases after prices dropped.
This rebound came after a sell-off triggered by the Federal Reserve’s reassessment of interest rate cut expectations.

Content

Stock and Bond Performance

Earnings Expectations

Financial Sector Earnings Season

Positive Signals for Buying

Bond Yields and Their Impact

Stock and Bond Performance in the Current Market Outlook

Shares of about 380 companies in the S&P 500 index rose,
helping the index recover from losses of approximately 1% early Monday.
Energy companies contributed to the recovery, supported by rising oil prices,
while banking stocks gained ahead of the financial earnings season.
However, tech giants like Nvidia and Apple saw limited declines.

Bonds showed minor movements following earlier declines,
driven by reduced expectations of significant interest rate cuts this year amidst persistent inflationary pressures.
Chris Larkin of E*Trade, a subsidiary of Morgan Stanley, commented,
“Although this week’s lower-than-expected inflation data may not push the Federal Reserve

to implement another rate cut this month, it could help ease some negative momentum.
A strong start to the earnings season could achieve the same effect.”

Earnings Expectations

Kallie Cox of Ritholtz Wealth Management believes that analysts have significantly lowered earnings expectations,
but the extent of this reduction is unusual.
She suggests that upcoming reports over the next few weeks could play a role in stabilizing the market.

Cox added:
“If there’s a lesson we can learn, it’s that earnings remind us of how we got to this point.
Recognizing how significant this is for the current economic situation is important.
High expectations caused setbacks,
but this decline could attract more buyers simply because economic fundamentals remain strong.”

The S&P 500 index rose by 0.2%, while the Nasdaq 100 declined by 0.3%.
Meanwhile, the Dow Jones Industrial Average increased by 0.9%.
In contrast, Bloomberg’s “Magnificent Seven” index of major tech stocks,
including Apple, Nvidia, Amazon, Alphabet, Meta, Microsoft, and Tesla, fell by 0.4%.
The Russell 2000 index, which tracks smaller companies, rose by 0.2%.

Financial Sector Earnings Season: Expectations and Insights

The financial sector earnings season kicks off this week,
Major banks like JPMorgan and Wells Fargo are expected
to report consistent gains from trading revenues and investment banking operations.
These revenues have helped offset declines in net interest income due to higher deposits and weaker loan demand.

Attention will also focus on banks’ forecasts for 2025,
especially as the Federal Reserve signals fewer rate cuts this year,
which could negatively impact future earnings growth.

Michael Landsberg of Landsberg Bennett Private Wealth stated:
“Major banks often provide valuable insights into what we can expect from consumer-focused companies,
which will announce their earnings later this season.
If credit card usage is high, it is often a positive indicator for companies selling directly to consumers.”

Meanwhile, Meghan Horneman of Verdence Capital Advisors noted:
“Although economic growth has remained resilient in the face of persistent inflationary pressures,
we expect a growth slow during 2025.”
She added, “Current 2025 earnings projections might be overly optimistic.”

Horneman emphasized the importance of closely monitoring corporate leaders’ comments on inflation,
their outlook on the labor market, consumer spending patterns,
and the potential impact of management changes on future earnings.

This earnings season is expected to see historic volatility.
Options traders forecast that individual stocks in the S&P 500 will move an average of 4.7% in either direction after earnings announcements.
According to Bank of America strategists, this represents the largest single-day moves recorded in earnings history.

In a Monday note, Savita Subramanian, Head of U.S. Equity and Quantitative Strategy, wrote:
“We believe this earnings season will once again present a golden opportunity for stock selection.”

Positive Signals for Buying

HSBC strategists, led by Max Kettner, observed mild buy signals in market sentiment and repositioning indicators.
They suggested that this week’s surprises in U.S. economic data,
such as inflation and retail sales figures, could present buying opportunities for high-risk assets.
The strategists noted, “Sometimes, bad news can be good news for the market.”

Bond Yields and Their Impact on the Stock Market

The stock market has shown strong reactions to economic news since late 2024
the S&P 500 index has moved at least 1% in either direction
in 8 of the last 15 trading sessions since the Federal Reserve’s decision on December 18.

Michael Kantrowitz, Chief Investment Strategist at Piper Sandler,
emphasized that bond yields have become the primary indicator
for interpreting stock market sentiment more than any point in the last 30 years.
He suggested that market weakness is more likely to stem from high interest rates than weak growth,
a dynamic that began in 2022 with the most significant shift in stock valuation models since the 2007 peak.

Goldman Sachs strategists highlighted a sharp decline in funding spreads this year,
reflecting shifts in institutional investors’ stock allocations as the market re-evaluates the Federal Reserve’s rate trajectory.

According to the strategists, the funding spread
a measure of long-term exposure demand through financial derivatives like swaps,
options, and futures—fell to about 70 basis points from around 130 basis points in late December.
In a client note, John Marshall’s team at Goldman Sachs wrote,
“In our experience, significant short-term movements in funding spreads
always indicate changes in professional investors’ demand trends.
We believe pension funds, asset managers, hedge funds,
and trend-following managers have been sellers over the past few weeks.”

Wall Street Indices Bounce Back on Renewed Buying

Wall Street Indices Bounce Back on Renewed Buying

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