earnings

After a challenging 2022, the US stock market is looking weak in 2023 as well. Next week, investors could closely await the December CPI reading and bank earnings which would provide more insights into the health of the world’s largest economy.

Last year, the S&P 500 fell almost 20% and had its fourth worst year ever. The Nasdaq Composite fell by 33% while Dow Jones Industrial Average outperformed other indices with a loss of only about 9%.

Generac Holdings was the worst-performing S&P 500 stock of 2022 and lost 71.4% in the year. Match Group, Align Technology, and SVB Financial were the other top S&P 500 losers in that order and respectively lost 68.6%, 67.9%, and 66.1% in the year.

In 2022, US stocks had their worst year since 2008 and so far 2023 is looking no better as high inflation and a slowing economy are expected to take a toll on corporate earnings.

December CPI Expectations

Analysts expect December CPI to come in at 7.1% annualized, similar to the November reading. US CPI peaked at 9.1% in June and has since come down gradually amid the Fed’s rate hikes.

The Fed raised rates to 4.25-4.5% last year after multiple rounds of hikes. The US central bank is not done yet and the dot plot calls for rates to rise to 5-5.25% by the end of 2023. This would imply another 75-basis point rate hike this year.

Fed’s rate hikes and high inflation took a toll on corporate earnings last year. US car sales also fell prey to rising rates and interest rates on car loans rose to a two-decade high.

While rising inflation takes a toll on most sectors of the economy some of the investments can do well in an inflationary environment.

Investors Await Bank Earnings for More Insights into the US Economy

The earnings season for the fourth quarter of 2022 begins next week. We’ll get the earnings of leading banks like JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America. Bank earnings provide insights into the health of the economy and tend to impact the price action of wider markets also.

During the third quarter earnings season, banks provided a mixed forecast for the US economy. JPMorgan was especially quite bearish on the economy. Last year, the company’s CEO Jamie Dimon predicted a recession.

Berkshire Hathaway held major stakes in JPMorgan and Wells Fargo and was the largest stockholder of the latter at one point in time. Warren Buffett has since exited both these stocks but added more Bank of America shares.

While Buffett has trimmed his stake in several banking and financial companies, he opened a new position in Citigroup last year. Some Wall Street analysts also find Citigroup shares as an attractive buy due to the low valuation multiples as compared to peers. There is a guide on buying undervalued stocks.

Bank of America upgraded Citigroup ahead of earnings

Last week, Bank of America reiterated Citi as a buy ahead of its earnings release. In its note, it said, “While the near-term EPS outlook remains uncertain due to the macro backdrop and ongoing business exits (mgmt.’s 2023 guidance should help on this front).”

It added, “we believe that the combination of potential idiosyncratic catalysts and a discounted valuation creates an interesting risk/reward for investors looking to add exposure to a restructuring story.”

Citi has been trying to restructure its business and has exited several international markets. During the company’s earnings release, it might provide more color on its restructuring efforts.

All said the December inflation data and bank earnings would be crucial next week as markets gauge the impact of a slowing economy on corporate earnings.

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