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Market Momentum Meets Crucial Tests: Earnings & Inflation Gauges in Focus

The market sentiment is focused on growth and moving higher.

The stock market’s recent all-time high faces upcoming challenges, primarily stemming from a flurry of corporate earnings announcements and the release of PCE, the Federal Reserve’s preferred inflation indicator.  This upward movement in stocks aligns with positive consumer sentiment data and an optimistic outlook.

While most financial institutions have already reported earnings, Tech titans like Netflix (NFLX) and Tesla (TSLA) lead a busy earnings week. Other notable companies, such as Johnson and Johnson (JNJ), United Airlines (UAL), Verizon (VZ), and AT&T (ATT), are also scheduled to release earnings reports. 

Additionally, economic data is upcoming this week to confirm the strength of the consumer and economy. This week the pending home sales data, the durable goods, and the Personal Consumer Expenditures (PCE) Index. The PCE is the Fed’s preferred measure of inflation, which could help set the tone for the Fed’s future decision on interest rates.  Currently the market assumes the Fed will be cutting interest rates sooner because inflation is under control.

Data from December retail sales showed that consumers ended 2023 in a better position than previously anticipated. While reports of layoffs in various sectors have increased recently, the hard data on unemployment benefit claims hit its lowest weekly level since September 2022. Analysts now project that the U.S. economy likely grew at higher rate in the 4th quarter than expected.

Historically, the Presidential cycle has suggested that 4th year tends to favor the market. Additionally, the earnings estimate for the S&P 500 hints at a trend of improvement, with expectations of forthcoming growth in earnings and sales. The trajectory of inflation is currently falling, and interest rates should begin to follow.  Market optimism is further supported by increasing forecasts for GDP growth. Personal income is at near all-time highs.

Most importantly stock valuations remain attractive with earnings estimates remaining strong, while price-to-earnings (P/E) ratios remain below 2021 peak. Earnings outlook is stable, and many companies have growing optimistic earnings expectations for future quarters. 

The stock market has experienced a tremendous performance in recent months. Expectations lean toward a market that continues to surge with heightened optimism amidst a robust U.S. economy. While profit-taking might introduce some pullback, investors should persist in shifting their focus toward quality growth opportunities over the next 3-5 years.

Key Points:

1. Bullish sentiment fueled by data, but earnings key test

2. Tech Titans Lead Earnings Rush this week with Netflix, Tesla, and others.

3. Upcoming data: home sales, durables, PCE gauge inflation.

4. Market expects interest rate cuts 2024 based on falling inflation and economic growth forecasts.

5. Strong data bolsters optimism, but profit-taking and recession risks remain

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