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US Stocks Forecast: S&P 500 Pauses as Big Banks Stash Cash for a Bumpy 2023

US Stocks Forecast: S&P 500 Pauses as Big Banks Stash Cash for a Bumpy 2023

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S&P 500 Fundamental Forecast: Bearish

  • US banks hold up well on EPS measures but raise concern by building up cash reserves to account for credit losses
  • Rising sentiment in favor of smaller rate hike fails to propel US equities higher after encouraging CPI data
  • Risk events in the week ahead: China GDP, US PPI and retail sales
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US Banks Hold up Well on EPS Measures but Raise Concern by Building up Cash Reserves

On Friday US Banks Launched Earnings Season with results were fairly positive from an earnings per share (EPS) point of view with the outlier being Wells Fargo, of course. Going into the release, banking analysts were eying the ‘goldilocks scenario’ that can be described by a rising interest rate environment but not too high that it places undue stress on economic and loan performance. That way, banks stand to benefit from increased net interest income (interest earned on loaned funds is greater than interest paid on deposits) while hoping to reduce defaults.

What was clear form the respective reports was that banks had largely succeeded on the earnings front despite generalized declines in non-interest income streams like asset management or investment banking. However a more concerning development was the increase in the provisions for credit loss i.e. defaults. This trend suggests that the banking heads anticipate harsher economic conditions ahead and foresee a greater potential for defaults as the Fed looks to hike above 5%.

Encouraging US Inflation data Fails to Spur on US Equities

When ADP employment data released strong figures, market sentiment shifted towards the Fed’s way of thinking – more tightening – resulting in a stronger dollar to the detriment of equities. Since then, the positive CPI data reversed the direction of travel, lifting equities as the dollar eased lower.

The change in sentiment was clear to see when observing the CME Fed tool, gauging market derived probabilities for either a 25 bps hike or 50 bps hike. Probability of the lesser 20 bps hike dropped to 55% after the strong employment data but after the CPI figure, it shot up to 95%, revealing s a strong preference for the Fed to ease up on rates as inflation is cooling. Such optimism was not enough to maintain the upward momentum in equities as worrying messaging from banks dominated headlines.

CME FedWatch Tool – Market Implied Probabilities for the Next Fed Meeting

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Source: CME, prepared by Richard Snow

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Major Event Risk in the Week Ahead

Apart from earnings reports from Goldman Sachs, Morgan Stanley and Netflix, markets will get a better indication of risk appetite after the Chinses GDP results are released on Tuesday. A dire 1.8% for 2022 doesn’t bode well for the world’s second largest economy but the recent reopening of the country has certainly elevated metals prices – suggesting that things could shape up more favorably for China, and by extension, the rest of its trading partners.

Then on Wednesday, US PPI feeds into the inflation story as forecasts suggest a 0% month on month increase in prices. US equities enjoyed a temporary lift after CPI printed in line with consensus on Thursday but the lack of momentum helps underscore the market’s caution around economic headwinds and potentially disappointing earnings up ahead. Retail sales are anticipated to show another month of lower figures, this time over the holiday period as the December data is due on Thursday too.

Finally, the preliminary print for US building permits has an opportunity to show that despite elevated financing costs, building is set to go ahead.

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--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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