Earnings Season Brings Worries to Wall Street

What is wrong with the banking sector?

Goldman Sachs yesterday became the latest to fan worries about declining profit margins after the bank reported a +33% jump in compensation which contributed to a -13% decline in Q4 profits.

The escalating costs mirror similar results disclosed by fellow big banks JPMorgan and Citigroup, as well as numerous other companies that have already reported or issued earnings warnings in recent weeks.

Just over 4% of S&P 500 companies have released Q4 earnings, and about 60% of those have cited a negative impact from higher labor costs on current and/or expected future earnings.

10-Year Treasury yield

Stock prices are also facing headwinds from a big jump in bond yields. The 10-Year Treasury yield hit 1.88%, the highest since before the pandemic hit and up from a low of 1.36% in early December.

This is largely a reflection of the U.S. Federal Reserve’s more hawkish monetary policy shift that is widely expected to now bring four or five interest rate hikes in 2022. However, there is a lot of uncertainty surrounding the exact timing and degree of those hikes, with many on Wall Street worried that ongoing labor market tightness, supply chain disruptions, Covid-related shutdowns, and geopolitical tensions will continue to drive costs even higher.

That in turn would likely mean even more aggressive action from the Federal Reserve.

There’s a lot of talk that the 10-Year could eventually push to 2.3% or even 2.5%. the market had to deal with a similar jump in the 10-Year back in 2013 during the “Taper Tantrum” or when the Fed had to start reversing their easing policy that had been associated with the US housing crisis global market meltdown.

If you remember, the stock market went through a fairly rough patch that year as the Fed shifted policy but eventually the market selloff stabilized and stocks rebounded to have a good year. this time around, however, many Wall Street insiders are talking about how the double whammy of escalating costs and higher interest rates is driving a shift away from so-called “momentum” stocks and back toward old school investment fundamentals.

Meaning investors are turning away from hot, trendy stocks that have defied gravity-and lacked profits-in favor of companies with proven track records and good cash flows.

Inflation fears are also once again being exacerbated by the oil market with prices hitting a seven-year high, the highest level since October 2014. The latest jump stems largely from deteriorating relations between fellow OPEC members after Yemen’s Iran-aligned Houthi group attacked the United Arab Emirates overnight on Monday. A Saudi-led coalition retaliated with airstrikes on the Houthi group. The renewed tensions between the UAE and Saudi Arabia raise the risk of more disruptions to the already tight global oil supply outlook.

Data to watch

Today, investors will be digesting Housing Starts and Permits for December, both of which are expected to pull back slightly from last months results.

On the earnings front, today’s highlights include Alcoa, Bank of America, Discover, Fastenal, Kinder Morgan, Morgan Stanley, Procter & Gamble, State Street, United Airlines, United Health, and U.S. Bancorp.

I still think there’s some rough sailing and uncertainty in the waters ahead… Also keep in mind, the Nasdaq 100 is quickly approaching its 200-Day Moving Average. Bulls want to argue that we are going to see a big bounce higher once we test that level. Bears argue that a close below that level could bring on a wave of heavy computer based technical selling. I’m not sure who is going to come out correct but I expect we see some extremes as the battle plays out… stay nimble!

Think About This… Perhaps +40% of fund managers have never traded or invested in a rising rate and rising inflation environment.

For a look at all of today’s economic events, check out our economic calendar.