The financial markets experienced some turbulence last week due to a higher-than-expected consumer inflation reading. The Consumer Price Index (CPI) for January showed a year-over-year increase of 3.1%, surpassing expectations. This elevated inflation level, combined with less favorable details, led to a decline in stock prices for the week. Despite strong earnings reports from various companies, the S&P 500 ended the week down by 0.4%, with the Magnificent 7 stocks dropping 1.5%.
Earnings season continues at a slower pace, with Berkshire Hathaway expected to release its earnings report along with Warren Buffett’s annual letter to shareholders. Last week, Berkshire Hathaway made headlines with its stock moves, including additional purchases in the oil sector and reducing holdings in Apple.
The hotter-than-expected inflation reading raised concerns about a potential Federal Reserve rate cut, with the probability of a cut in May dropping below 30%. Market expectations now lean towards a rate cut in June. Treasury yields increased, reflecting the market's reaction to inflation data and Fed rate cut expectations.
The latest economic data, including consumer spending and housing starts, impacted stock performance. Economic growth expectations moderated after a streak of strong releases, leading to a correction in GDP growth estimates. Despite rising yields and delayed Fed rate cuts, interest rate-sensitive sectors like banks and utilities showed resilience in the market.
Earnings growth across sectors improved significantly, with the technology and industrial sectors contributing to the enhanced growth rate. Companies like Home Depot, Walmart, and NVIDIA are set to report earnings, with Walmart's performance closely watched for insights into consumer behavior.
Sales growth remains tied to the nominal GDP growth rate, providing tailwinds for company revenues. As earnings estimates outperform expectations, the blended earnings growth for the quarter stands at 3.2% year-over-year, surpassing initial projections. Market volatility is expected to persist as investors seek clarity on the economy and inflation trajectory.
With a quieter economic calendar this week, market focus shifts to earnings reports from key companies like Walmart and NVIDIA. Investors await further signals on consumer health and demand for artificial intelligence products to gauge market sentiment moving forward.
