The U.S. stock market saw a marginal uptick on Friday, fueled by the third consecutive monthly contraction of the Producer Price Index (PPI) for final demand, marking the longest downturn since 2020.  

In contrast, the core PPI, excluding food and energy, remained relatively stable for the third month, with the annual core gauge showing a modest 1.8% increase — the smallest advance since the close of 2020. This subdued PPI performance effectively offset the previous day’s higher-than-expected Consumer Price Index (CPI) figure. 

Over the week, 2-year yields witnessed a significant drop to their lowest levels since May, decreasing by 24 basis points.  

Bank earnings on Friday provided a mixed picture, with JPMorgan presenting an optimistic net interest income forecast, while Bank of America’s earnings fell short, and Wells Fargo reported higher-than-anticipated costs. 

Market Momentum 

The S&P 500 continued its winning streak, achieving its 10th weekly gain in eleven, as traders factored in an 80% likelihood of the Federal Reserve lowering rates in March — a notable increase from just over 50% a week earlier. 

For the week, the Dow Jones edged up by 0.3%, the S&P 500 gained 1.8%, and the Nasdaq surged by 3.1%. 

Here are the closing levels on Friday, January 12^th, 2024: 

Earnings Projections And Market Sentiments 

Despite the focus on the countdown to a potential Fed rate cut, upcoming earnings releases in the next few weeks may shift attention. 

Bloomberg Intelligence data projects a 1.1% year-on-year increase in S&P 500 earnings-per-share for the fourth quarter, but this figure has steadily declined in recent months.  

Excluding top companies like Apple, 4Q EPS is estimated to decline by 7%.  

While companies typically exceed estimates, optimistic outlooks are crucial to supporting the projected 11% EPS growth for 2024. Cautious guidance may face repercussions in the market. 

Insights From Commitment Of Traders Report 

The latest Commitment of Traders report from the Commodity Futures Trading Commission (CFTC) revealed substantial buying of S&P futures, reaching 97k — the most significant weekly inflow in almost two years.  

The Russell also experienced its most substantial weekly buying since late 2022 (22k), with the nominal net position now long for the first time in nearly three years. While the Dow saw a modest amount of buying (5k), there was slight selling of NDX futures (2k). 

Market Caution And Looking Ahead 

While these positions are often speculative, they indicate extended long positions in S&P, potentially signaling an overbought market. Although we have recaptured the bullish momentum from last year, challenges arise when attempting to establish new highs. A decisive break above previous highs is essential for further market ascent; otherwise, brace for the possibility of another retracement. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.