On Tuesday, the US stock market closed with losses as investors considered both corporate earnings and a statement from a Federal Reserve member who hinted at a reduced need for interest rate reductions in the future.

How stocks traded

Stock prices experienced growth in the previous week, as the S&P 500 ended Friday only 0.3% below its highest ever closing mark.

What drove markets

At the beginning of the week, traders were cautious as they evaluated new corporate outcomes from banks and discouraging manufacturing updates. Additionally, they were reminded that interest rate reductions may not be imminent.

Christopher Waller, a governor at the Federal Reserve, stated on Tuesday that the central bank will probably decrease interest rates later this year, but he emphasized that the adjustment in monetary policy does not need to be done hastily. As a result of his comments, stock prices declined while bond yields increased.

Investors took notice when Waller, who is known for having a more aggressive stance, expressed concerns about the possibility of a slowing economy that needed to be addressed to tackle inflation.

There is a high likelihood of the Fed delaying any changes to its policies at the January meeting, however, there was a 68% probability that interest rates would be lowered by 25 basis points in March, as estimated by the CME FedWatch tool. This probability slightly decreased to 63% after Waller’s comments on Tuesday.

Quincy Krosby, the chief global strategist at LPL Financial, stated that the idea of a changing market had been present as early as March. Krosby mentioned that Waller, who is generally seen as a practical and cautious individual, along with other officials at the Federal Reserve, now seem to be sending a coordinated message to the markets, advising them to proceed with caution rather than rushing.

According to Krosby, the possibility of a decrease in interest rates in March heavily depends on the data received and also on the rise of oil prices due to problems in the Middle East.

Investors are simultaneously receiving fresh information on the future outlook of the economy as they begin to receive fourth-quarter earnings.

On Tuesday, Goldman Sachs, Morgan Stanley, and PNC Financial Services announced their earnings before the stock market opened. Later in the day, Interactive Brokers and Pinnacle Financial Partners will also be releasing their earnings reports.

After the launch of earnings season on Friday, several major banks, including JPMorgan Chase & Co. JPM, -0.63%, released their financial reports.

According to BlackRock Investment Institute experts, earnings have the potential to greatly impact the markets.

The authors, led by Jean Boivin, head of the BlackRock Investment Institute, state that there will be a stronger emphasis on earnings this year compared to the previous year, as consensus expectations have increased. LSEG data indicates that there is now an anticipated growth of up to 11% in the next 12 months. The authors suggest that the earnings season in the fourth quarter of 2023 will provide more insight into how these expectations will develop.

In spite of companies maintaining their profit margins, Boivin and his colleagues predict that these margins will eventually return to normal levels. This is expected to occur due to the influence of increasing interest rates, continuous wage growth, and inflation that, although still above the desired target, is decreasing.

According to Krosby from LPL, the concern for markets is the extent to which companies have the ability to control prices.

On Tuesday, there was additional manufacturing data from the United States to take into account. The factory index of the New York Federal Reserve declined significantly from -14.5 in December to -43.7 this month, marking the lowest level since May 2020. Observers noted that the important aspect is determining the significance, whether large or small, of these figures.

Investors should also take into account geopolitical conflicts. The increased tensions in the Middle East have caused concerns about possible disruptions in shipping through the Red Sea, which could contribute to inflationary pressures. However, oil futures experienced a decrease on Tuesday.

Companies in focus

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