The US stock market kicked off the earnings season with strong momentum as major banks reported solid financial results, drivingstocks to new all-time highs. 

The S&P 500 surpassed the 5,800 mark, marking its 45th record high of the year. Earlier concerns that the Federal Reserve’s anticipated rate cuts might negatively impact bank profits were eased by better-than-expected results from JPMorgan Chase and Wells Fargo.  

Banking Sector Drives Gains  

JPMorgan Chase exceeded expectations with a surprise increase in net interest income, while Wells Fargo’s net interest income (NII) decline was less severe than anticipated. Both stocks climbed by at least 5%, boosting the KBW Bank Index to its highest level since April 2022. 

Broader Market Performance  

The broader market followed suit, extending the S&P500’s winning streak to five consecutive weeks. The Nasdaq 100 and Dow Jones Industrial Average also posted gains. 

While most sectors performed well, Tesla’s stock took a hit, dropping 8% following the unveiling of its Robotaxi, which lacked concrete details, disappointing investors In contrast, ride-sharing giants Uber and Lyft saw significant increases, gaining over 8.5% each. 

In the bond market, shorter-term Treasury yields outperformed longer-term maturities. The US dollar remained stable, and oil prices retreated slightly. 

Friday’s Closing Levels:  

Is a Market Pullback Coming? 

Few things are as bullish as stocks hitting new all-time highs, and right now, it seems like nothing can stop this rally. However, it’s important to stay cautious to avoid potential disappointment. 

Some technical analysts had predicted this rally by comparing it to previous times when the Fed began a rate-cutting cycle. However, they caution that the next move could be a pullback. The magnitude of the retracement depends on whether a recession is looming. 

Historically, if a recession followed rate cuts, the market lost significant value. In non-recessionary periods, the market bounced back and continued to hit new highs after a pullback. 

Factors That Could Signal a Pullback 

Several indicators suggest a potential retracement: 

• 10-year yields remain above 4% and are rising. 

• The CME FedWatch Tool now shows a 10.5% chance of no rate cut. 

• The VIX is still above 20, signaling ongoing market volatility. 

• Elevated oil prices, geopolitical tensions, and inflation concerns continue to loom. 

• While the jobs data looks positive, questions remain about its reliability and sustainability. 

• The upcoming elections are also likely to introduce volatility. 

Positives for Continued Rally: Earnings Season Outlook 

The positives for a continued rally were evident in the start of earnings season on Friday. If companies continue to report better-than-expected earnings, it will be hard to see any significant retracement. 

That said, given the overbought nature of the market and the various macroeconomic risks, a pullback seems increasingly likely. Preparing for this possibility could save investors from unnecessary pain and heartache. 

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 US bank exceeding 20 years.

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