The three major indexes spent most or all of Tuesday in the red following some mixed corporate earnings reports and hawkish comments on the need for speedy interest rate cuts from a Fed governor.
Never mind that fourth-quarter earnings season is kicking into gear, or the busy schedule of economic reports due this week. The market can't help but work itself up over every utterance by a central banker, notes Deutsche Bank senior U.S. economist Brett Ryan.
"Despite a fair amount of economic data releases, the Fedspeak docket will likely garner the most attention during this holiday-shortened week," writes Ryan in note to clients.
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That was certainly the case today. Federal Reserve Governor Christopher Waller said early Tuesday that the Federal Open Market Committee (FOMC) will likely cut interest rates this year, but stressed the process doesn't have to be "rushed."
Waller's cautious attitude toward cuts poured some cold water on expectations for looser monetary policy coming soon. Interest rate traders now assign a 65% probability to the FOMC enacting its first quarter-point rate cut in March, down from 77% a day ago, according to CME Group's FedWatch Tool.
"Recall that Waller's dovish shift in late November was a key precursor to the subsequent Fed pivot at the December FOMC meeting," Ryan notes, "and sparked market expectations for rate cuts in Q1 of this year."
Earnings in focus
Big bank earnings continued to roll in Tuesday, with two of Wall Street's most illustrious names going in opposite directions.
Goldman Sachs (GS), which happens to be one of analysts' top-rated Dow Jones stocks, reported better-than-expected Q4 earnings per share (EPS) and revenue. Shares traded fractionally higher on the news. Meanwhile, at Morgan Stanley (MS), revenue topped forecasts by a wide margin, but EPS came up short. MS stock fell 4.2% in response.
Financial stocks once again dominate the earnings calendar tomorrow, with Citizens Financial Group (CFG), Discover Financial Services (DFS) and U.S. Bancorp (USB) just three sector names set to report.
A slow start to the fourth-quarter earnings season is contributing to market weakness, says Jeffrey Buchbinder, chief equity strategist at LPL Financial.
"Fourth quarter earnings season kicked off last week, and markets were generally left wanting more," Buchbinder writes in a note to clients.
That doesn't mean we're in for a "disappointing" earnings period, the strategist says, especially given Wall Street's low expectations (as they should be easy to beat). However, companies do need to provide the sort of financial guidance that supports higher share prices.
"This reporting period may lack the splashy 'earnings recession is over' headlines we got last quarter," Buchbinder says, "but it takes on added importance because it sets the tone for 2024."
After all, if 2023 was a year "in which improving valuations delivered strong gains, this year earnings will likely have to do the heavy lifting," says Buchbinder.
More bad factory news
On the economic calendar, market participants received more downbeat news from the U.S. manufacturing sector. The Federal Reserve Bank of New York's factory index decelerated sharply this month to -43.7 from -14.5 in December.
That's the lowest reading in the history of the index outside of April 2020, notes Jan Hatzius, chief economist at Goldman Sachs.
However, the survey has been "particularly volatile since 2022," Hatzius writes, swinging by at least 20 points in more than half its instances. "We think issues related to seasonal adjustment likely contributed to the large month-over-month decline," the economist adds.
Boeing dives again
In other corporate news, shares in Boeing (BA) fell 7.8% on Tuesday after the Federal Aviation Administration announced "new and significant actions to immediately increase its oversight of Boeing production and manufacturing."
The FAA grounded approximately 171 Boeing 737-9 Max jetliners after an emergency door plug blew out during an Alaska Airlines (ALK) flight in early January.
Wells Fargo analyst Matthew Akers warned clients that the FAA's audit "opens up a whole new can of worms" for the aerospace giant. Akers downgraded BA stock to Hold from Buy.
At the close, the blue chip Dow Jones Industrial Average was off 0.6% at 37,361, while the broader S&P 500 slipped 0.4% to 4,765. The tech-heavy Nasdaq Composite shed 0.2% to end at 14,944.
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