As Earnings Season Begins, Any Big Miss Will Likely Be Punished

Slightly higher-than-expected CPI and higher-than-expected weekly unemployment claims triggered profit-taking on Thursday and set the stage for the start of the third-quarter earnings reporting season.

The data didn’t generate a big move, but it did shift the market narrative slightly. Fed Fund futures are now pricing in the near certainty of quarter-point cuts at the Fed meetings in November and December, and there is little chance seen of another half-point cut.

The news also may explain why the bond market has recently been so weak, as equities have been trending higher. There are still some signs of inflationary pressure, and when combined with the higher number of unemployment claims, it raises concerns about the potential for stagflation.

The main driving force for the bulls has been the belief that the economy has near-perfect conditions with low inflation, steady growth, and a dovish Fed. The bears have been questioning that belief and been ignored, but data like we saw on Thursday morning put a slight dent in the Goldilocks economic scenario.

Breadth was poor at more than two-to-one negative, and small-caps lagged with a decline of around 0.7%. Nvidia NVDA continues to be the bright spot in big-cap technology as the other Magnificent Seven names are no longer very magnificent.

Earnings season starts Friday morning with the banks, and we will see what sort of expectations the market has been developing. With the indexes not that far from the highs, it is likely that any significant miss will be punished. Also, it will be very interesting to see the confidence levels of management and how they guide earnings as the Fed cuts rates and the economy slows.

It is going to take some good news to keep this trend going, but the dip buyers are being very stubborn about allowing any pullback to gain momentum.

Have a good evening. I’ll see you in the morning.

At the time of publication, Rev Shark was long NVDA.