The Nasdaq composite led markets higher on Wednesday, rallying over 100 points as investors positioned themselves ahead of major inflation data and the start of earnings season. Several key factors drove optimism that markets can continue their recent rally.
Solid Economic Data Boosts Sentiment
Recent economic reports indicate the economy remains on solid ground, supporting the case for markets to move higher. The latest ISM services index showed continued growth, consumer confidence remains resilient, and job openings unexpectedly rose. This has eased some concerns about an imminent recession.
As Ryan Detrick, chief market strategist at Carson Group noted:
“The economy is clearly not falling off a cliff, and while the Fed wants to see demand cool off, stock markets are breathing a sigh of relief it’s happening slowly, not all at once.”
With markets pricing in an economic soft landing, investors were willing to take on more risk ahead of critical inflation and earnings data.
Traders Anticipate Peak Hawkishness from the Fed
Markets are also growing increasingly confident that the Fed is approaching “peak hawkishness” in their rate hiking cycle. Comments from Fed speakers have turned more dovish recently as inflation shows signs of cooling.
This has fueled expectations that the Fed could slow the pace of hikes following the anticipated 25 basis point increase at their upcoming meeting. As Charlie Biello, founder of Pension Partners noted:
“There’s rising optimism that inflation has peaked, which would mean less Fed hawkishness and rate hikes going forward.”
If inflation shows further deceleration in Thursday’s CPI print, it would reinforce this narrative and provide additional support to the recent rally.
Banks Kick Off Critical Earnings Season
Earnings season also gets underway this week, with major banks among the first to report Q4 results on Friday. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup will provide critical insight into the health of consumers and businesses.
So far, expectations are muted, with S&P 500 earnings forecast to decline nearly 7% in Q4. However, the bar has been significantly lowered which opens the door for upside surprises. Any positive earnings news, especially from bellwethers like the big banks, could extend the January rally.
As TradeStation explained:
“It’s put up or shut up time for stocks, as Q4 earnings roll in and the potential is there for companies to either confirm the pessimism or perhaps begin to change some minds.”
|Q4 Earnings Estimate
|$3.04 per share
|Bank of America
|$0.77 per share
|$1.09 per share
|$1.31 per share
With sentiment improving heading into these two critical events, markets posted solid gains on Wednesday. The Nasdaq composite led the way higher, rallying 1.76%. The S&P 500 gained 1.28% to close at new one-month highs, while the Dow Jones Industrial Average climbed 0.8%.
Inflation Data Looms Large
Markets have shown resilience in recent sessions, but inflation remains a pivotal focus for investors. The December consumer price index (CPI) report will dominate on Thursday.
Economists forecast a 6.5% year-over-year inflation rate, down from 7.1% in November. Further deceleration would support the narrative of peaking inflation and reduce pressure on the Fed to maintain an ultra-hawkish stance.
However, an unexpected acceleration could dash hopes for a Fed pivot and derail the January rally. This binary outcome makes the inflation print the biggest event of the week.
As Stephen Gandel, senior editor at Bloomberg explained:
“The market right now is optimistic that the Fed is close to declaring victory on inflation and will start cutting rates later this year. All thatOptimism hangs on Thursday’s CPI report.”
While traders appear positioned for a favorable reading, the reaction could still be significant given inflation’s oversized influence on monetary policy and market psychology.
Nasdaq Leads Charge Higher
Ahead of this critical report, dip-buyers emerged on Wall Street – especially in beaten-down technology stocks. The tech-heavy Nasdaq has fallen further than the broader market in 2022 and stands the most to gain from peaking inflation and a less aggressive Fed.
Apple, Microsoft, and Tesla all posted strong 2%+ gains on Wednesday, lifted by the positive economic data, shifting rate hike expectations, and investors plowing money back into growth.
The Nasdaq rallied 1.76% and cleared a key technical resistance level at 10,500. It is now positive for 2023 and up 8.3% from its October lows.
Surging oil prices also boosted energy stocks like Exxon and Chevron to 52-week highs. The energy sector was the best performing segment on Wednesday, gaining over 2%.
Meanwhile, the benchmark S&P 500 closed at one-month highs after gaining 1.28%. It remains down 18% from its 2022 peak but has bounced nearly 8% off its October bottom.
The Dow added 0.8%, lifted by energy shares and outperformance from Boeing after the company reported yearly aircraft delivery figures.
Volatility Remains Elevated
Despite recent gains, the S&P 500 has moved 1% or more in either direction for six straight sessions. This signals traders remain sensitive to headlines around inflation, monetary policy, and growth.
Ongoing volatility is partly fueled by shifting narratives of whether the economy can achieve a soft landing. This debate leads to rapid rotations between stock sectors based on growth and interest rate outlooks.
As Bespoke Investment Group noted, conflicting opinions and unpredictable swings have been a dominant theme:
“The market’s personality of late is like that of someone with a multiple personality disorder. We’ve seen inspiring rallies and declines that have seemed like capitulations all in the last couple of months.”
With uncertainty still elevated, activity could remain choppy in the near-term. US futures are subdued early Thursday, pointing to a muted open ahead of 8:30 AM ET CPI data.
However, any surprises from the inflation print and bank earnings could set the tone for markets over the next several weeks. After this week, the Q4 earnings season will kick into high gear, providing critical glimpses into consumer demand and corporate health.
So while various technical and sentiment indicators show oversold conditions that typically precede durable bottoms, confirmation through fundamentals remains lacking. That makes upcoming inflation data and earnings reports indispensable for determining if January’s rally is the start of a sustained move higher or another head fake.
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