Written by Samer Hasn, Senior Market Analyst at XS.com
S&P 500 E-mini futures are up 0.4% this morning, surpassing 6,000 points after gaining 1.83% yesterday. Nasdaq 100 futures are up more than 0.6% today after also rising more than 2% yesterday.
The gains in the stock indexes come as more optimism about the ability of companies and the U.S. economy to adapt to a higher interest rate environment. This optimism comes as the quarterly earnings season got off to a strong start, led by the major banks, which reported better-than-expected results.
JPMorgan Chase, Wells Fargo, Goldman Sachs, and Citigroup all reported better-than-expected earnings per share. Revenues for all three, except for Wells Fargo, were also better than expected. This comes as banks benefit from the optimism of major companies about the economy and the upcoming presidency of Donald Trump and the greed to borrow to finance large projects in addition to the acceleration of growth in investment banking businesses, according to The Wall Street Journal.
The results published yesterday were enough to prove to investors that the upward outlook for inflation and the higher-for-linger interest rates and the subsequent rise in bond yields will not prevent the stock market from continuing its bullish trend, even with high valuations. Also, healthy results from banks help to reinforce the healthy image of the economy, and favorable earnings results from tech companies will justify high valuations, which we will wait to see during this season.
However, yesterday’s quarterly reports and the talk from bank executives were not completely free of negative points. High inflation continues to affect commercial and small businesses, as commercial loans at JPMorgan fell by 2% in the last quarter on an annual basis, and net written-off loans grew by 9%, driven by the bank card business, according to The Journal. While inflation has been on the rise in the last three readings up to December for the Consumer Price Index, which reached 2.9% on an annual basis, according to data also published yesterday. However, the December reading was in line with expectations, and core inflation growth, which excludes food and energy items, was weaker than expected, which gave some comfort to investors and allowed stocks to benefit from the banks’ results.
On the other hand, yesterday’s inflation data did not change expectations about the path of monetary policy, and a rate cut during the first half of this year is still unlikely. The probability that the Federal Reserve will cut interest rates by 25 basis points from the current range at its next meeting in May is 37%, according to the CME FedWatch Tool.
Another factor that is causing caution among bankers is geopolitical tensions around the world. JP Morgan CEO Jamie Dimon said that geopolitical conditions are the most dangerous and complicated since World War II. Geopolitical tensions in turn come from the ongoing war in Ukraine and in the Middle East, mainly.
While the ceasefire agreement in Gaza has raised optimism about the possibility of establishing a broader peace in the Middle East, since the spark of the recent regional conflict began there, concerns remain about the durability of this calm. The extreme right in Israel may seek to obstruct the next phase of the agreement, which they rejected in the first place. David Ignatius also warns in an opinion piece in The Washington Post about the consequences of the acceleration of settlements in the West Bank on establishing peace, based on statements made by Secretary of State Antony Blinken after the agreement was reached.
In addition, the extinguishing the fronts in Lebanon, Gaza, and Syria may be a preparation for a greater escalation against the Houthis in Yemen and Iran by exploiting the latter’s weakness. Therefore, we may witness new chapters of the regional conflict in the coming days and weeks, but I do not believe that it will last long or extend its effects to harm major economic interests in the region.