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Equity Markets Reach New Heights Amid Earnings Season Uncertainty and Global Strife

By:JJ Kinahan

Market volatility remains low as international conflicts failing to rattle investors. Meanwhile Macy’s is laying off workers while turning down a buyout offer.

  • Stocks are soaring despite unease about earnings reports, causing some investors to brace for their impact on an uncertain market.
  • Macy's has rejected an offer of $21 per share amid earnings flux as the retail giant navigates turbulent economic waters.
  • Markets are remaining resilient as investors eye economic indicators and earnings season amid global turmoil.

Equity markets are witnessing a surge that’s achieving unprecedented milestones. Last week, the S&P 500 marked a historic closure, experiencing a remarkable gain of 1.17%. Concurrently, the Nasdaq Composite is inching closer to its all-time highs, boasting a gain of just over 2.25%.

But as we enter earnings season, coupled with crucial economic data preceding the Jan. 31 Federal Open Market Committee meeting, the trajectory of stocks in the coming weeks remains uncertain.

Earnings season sends mixed signals

In the early stages of earnings season, 43 stocks in the S&P 500 have already reported earnings. According to Barron's, an impressive 88% exceeded earnings estimates. However, an intriguing trend emerges as 60% of these companies witnessed a decline in their stock prices the following trading day.

Even more disconcerting is the fact that 72% of these companies have lagged behind the S&P since their earnings reports. This raises concerns, especially considering that investors have already significantly adjusted their earnings expectations.

In October, consensus estimates for( S&P 500 projected 11% earnings growth in the fourth quarter, but these estimates have since been slashed to a modest 4.5%. The upcoming week will feature earnings reports from major players such as airlines, CSX (CSX), IBM (IBM), Netflix (NFLX), Johnson and Johnson (JNU), Tesla (TSLA), and Visa (V).

Forward-looking statements accompanying earnings reports will be important. Analysts are anticipating 11% earnings growth for 2024, and it remains to be seen how these projections align with the present expectations. Notably, if companies meet these growth rates, the price/earnings (P/E) ratio for the S&P 500 will stand at 20, consistent with its historical average. However, falling short of earnings expectations will elevate this ratio.

While Macy’s isn’t reporting earnings this week, the retailer is under scrutiny because of the $21 per share acquisition offer from Arkhouse Management and Brigade Capital Management. Macy's promptly rejected the bid, but the acquirers expressed willingness to revise their offer. This follows Macy's recent initiatives to enhance its performance, including a workforce reduction of 2,350 employees.

Turning to the economic calendar, significant reports are scheduled for release. Thursday will see the unveiling of durable goods orders and the initial reading of fourth-quarter gross domestic product (GDP). On Friday, the personal consumptions expenditures report—the Federal Reserve’s preferred measure of inflation—will be disclosed. Anticipation for an interest rate cut in March has dipped below 50%, down from nearly 80% at the beginning of 2024, a trend that warrants close monitoring.

Global discord hasn’t spooked the markets

Despite tumultuous global events, market volatility has shown no substantial increase this year. The VIX, a measure of market volatility, closed Friday at 13.30, well below its historical average. This stability persists despite heightened tensions in the Middle East, dark rhetoric from North Korea, the ongoing conflict in Ukraine, recent elections in Taiwan and the upcoming U.S. election cycle.

While the apparent lack of response in market volatility is perplexing, caution against complacency is advised. Staying aligned with long-term investment plans and objectives remains prudent amid dynamic global events.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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