Wall Street Week Ahead: High market hopes raise stakes as US stocks face inflation data, earnings

NEW YORK: Investors’ hopes are running high to start 2024, which could set up US stocks for a rocky stretch if some expectations are not met.

Despite a shaky start to the year, the S&P 500 stands only around 2% below a fresh record high. Most investors have maintained a rosy view on everything from the US economy and corporate profits to the Federal Reserve’s monetary policy trajectory.

For example, the narrative of resilient growth and gradually cooling inflation that helped boost the S&P 500 to a 24% gain last year has become the consensus view among investors.

The latest BofA Global Research survey, released last month, showed 66% of fund managers believed the economy will achieve a soft landing in 2024. Only 15% of fund managers expected a recession in the next 12 months, BofA’s data showed, a sharp contrast from a year earlier, when 68% of investors expected a recession.

Bets on easier monetary policy have gone hand-in-hand with the soft-landing outlook. Futures tied to the Fed’s policy rates show investors pricing in around 140 basis points of interest rate cuts this year, nearly twice what the central bank itself has projected.

Not surprisingly, many investors have a positive outlook on stocks. Bullish sentiment rose to 48.6% in the latest week — a notch down from its recent peak in December, but well above the historic average of 37.5%, the American Association of Individual Investors survey showed.

Those views have been shaped in large part by tangible evidence of cooling inflation, a comparatively strong economy and the Fed’s own guidance, after policymakers surprised markets with a dovish pivot last month.

With stocks near historical highs and at elevated valuations, however, some investors worry the market’s sunny outlook leaves more room for disappointment if any of those scenarios do not materialize.

“Anything that throws off the current economic narrative or market narrative – the risk of that disappointment flowing through to prices in equities is higher,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management.

One test of investors’ optimism comes with this week’s consumer price data, which could show whether recent bets on ebbing inflation have been premature. Expectations for a cooling economy that could set the stage for Fed rate cuts took a hit on Friday, after jobs data showed employers hired more workers than expected in December while raising wages at a solid clip.

The S&P 500 fell 1.54% this week, the biggest weekly decline since late October.

Major banks including JPMorgan Chase and Citigroup kick off earnings season this week, testing elevated expectations for corporate profits. Analysts expect S&P 500 earnings to rise by 11% in 2024 after increasing just 3% in 2023, according to LSEG data.