China’s latest economic stimulus plans failed to impress investors, leaving world markets stagnant and oil prices lower on Monday. The vague details of the measures did not provide enough clarity to boost confidence. “It remains uncertain whether the market will finish the year as strongly as it began and whether this easing cycle will provide substantial momentum for equities,” National Bank of Canada economists, including Stefane Marion, wrote to clients.
Corporate earnings reports are the next test for the stock market rally that pushed the S&P 500 to a record high last week. Results from major banks like Citigroup, Goldman Sachs, and Bank of America are due Tuesday, providing an early look at how interest rate cuts are impacting their profits. In Europe, earnings are expected to be weaker due to slow economic growth and a sluggish recovery in China, likely hurting luxury goods makers such as LVMH.
This is anticipated to solidify the European Central Bank’s decision to cut interest rates, something policymakers had nearly ruled out just a month ago.
Corporate earnings key to markets
“Clearly, softer activity data and faster disinflation have had an immediate impact on both ECB communication and markets, which are now pricing a 95% probability of a 25-basis point cut this week,” Barclays strategists, including Themistoklis Fiotakis, wrote to clients.
Germany is in a mild recession, with flat output projected for 2024, according to a Bloomberg survey. Concerns about the French economy and German slowdown weighed on the euro Monday. Stock futures were little changed as investors waited for key corporate earnings to assess if the reports could power the market to more records.
The S&P 500 closed above 5,800 for the first time last week. Despite the market highs, investors remain anxious about the presidential election, rising Treasury yields, uncertainty around the Fed’s policy path, and escalating Middle East tensions. However, “the big four macro tailwinds (stimulus, resilient growth, disinflation, and healthy corporate performance) are all still in place and they’re powerful enough to overcome rich valuations and geopolitical risks, keeping the SPX on an upward trajectory,” said Adam Crisafulli of Vital Knowledge.
