Markets Will Continue to Flash Weakness as Earnings Season Begins

The S&P 500 broke its nine-week winning streak last week, the longest such streak since 2004. The index fell just over one and a half percent in the holiday shortened week. The Nasdaq fell 3.25% as the yield on the 10-Year Treasury closed above the four percent mark on Friday for the first time since mid-December. The small-cap Russell 2000 was off just over 3.5% after a massive rally in the last two months of 2023. Part of the six-basis point climb in yields on Friday was attributable to the 'stronger' than expected December BLS Jobs Report.

However, this data should be taken with a large grain of salt. This administration has a consistent habit of trumpeting strong economic data only to have these numbers revised down quietly a month or two down the road. In fact, 10 of the 11 BLS reports in FY2023 have been downwardly revised and December looks like it will the eleventh report from last year to see that fate.

Full times jobs actually fell substantially in December according to the Household Survey, and according to this source there has been no cumulative full-time job growth in the economy since February. Part time jobs soared during the month. The number of Americans working two jobs or more to make ends meet were also up more than 220,000 to a record just north of 8.55 million.

Apple (AAPL) is off to a rough start to the year. This is important as it was a core part of the outstanding performance of the Magnificent Seven last year. The stock gained just over 40% in 2023 despite Apple's flat profits and slightly negative revenue growth during the year. The shares have been hit early in 2024 by a couple of prominent analyst downgrades and could face potentially its biggest antitrust challenges in years.

Continued weakness in Apple could be a significant headwind for the overall markets given it has the largest market capitalization of any stock and is a major component of both the S&P 500 and the Nasdaq, representing approximately seven and nine percent of these indexes, respectfully.

We also have fourth quarter earnings season kicking off late this week with reports from the major banks like JPMorgan Chase (JPM) and Citigroup (C) . FactSet currently sees 1.3% year-over-year profit growth for the fourth quarter for the S&P 500. Given analysts were expecting eight percent growth in September, I expect S&P earnings to easily step over this lowered bar. This is all part of the 'analyst two-step' that happens consistently every quarter. More important than actual results will be the forward guidance we get from company managements around consumer demand and the overall economy.

Given economic growth has markedly slowed down from the blistering five percent rise in Q3, I expect most commentary from these companies to be exceedingly cautious. This does not bode well for investor sentiment in the early innings of 2024. I also expect the weakness in equities we have seen so far in the New Year to carry over in the coming weeks.

Finally, I think investors that were factoring in the first rate cut by the Federal Reserve in March, which went into last week with a better than 70% chance of occurring according to futures, are likely to be disappointed. We will find out more on this front when December CPI and PPI readings come out later this week.

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At the time of publication, Bret Jensen had no position in the securities mentioned.