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New York CNN — With interest rate cuts on hold, Wall Street is counting on corporate earnings to sustain the 2024 stock market rally.
Analysts polled by FactSet expect second-quarter earnings of S&P 500 companies to grow by about 8.7% on average from the previous year. This would mark the fourth consecutive quarter of annual earnings growth for the benchmark index.
Strong corporate earnings have contributed to the S&P 500’s impressive 16% gain and multiple record high closes this year. Despite persistent inflation in the first quarter pushing interest rate expectations further out, recent data suggests inflation is cooling again. However, the Federal Reserve indicated only one interest rate cut for 2024 at its June policy meeting.
Investors are now predicting up to three cuts, compared to the six or seven forecasted at the beginning of the year.
Federal Reserve Chair Jerome Powell stated at a central bank policy forum in Sintra, Portugal, that prices are back on a “disinflationary path.” However, he emphasized that more data is needed before considering rate cuts.
With the Fed unlikely to cut rates soon, strong corporate earnings must continue driving the market rally. High interest rates tend to negatively impact stocks by increasing corporate borrowing costs and making risk-free government bonds more attractive.
“Earnings growth will be key to holding, or potentially building on these gains,” wrote Jeffrey Buchbinder, chief equity strategist at LPL Financial, in a Monday note.
Earnings season begins July 12, with major banks like JPMorgan Chase, Wells Fargo, and Citigroup reporting results. Investors will look for indicators of consumer health, as recent economic data and warnings from retailers suggest that lower- and middle-income Americans are cutting back on spending.
The June jobs report, due Friday, will provide insights into the strength of the labor market. Preliminary data on Tuesday showed an unexpected increase in job openings to 8.14 million in May, indicating the labor market remains strong despite high rates.
Investors will also closely monitor results from mega-cap tech stocks, whose strong returns account for much of the market’s gains this year. Nvidia, the leader, has seen shares rise 159% in 2024 after reaching a $3 trillion market cap for the first time in June. Microsoft shares are up 23%, Meta Platforms shares have jumped 44%, and Amazon shares, which joined the $2 trillion club last month, are up 30%.
Wall Street is seeking signs that these companies’ balance sheets justify their high valuations. The S&P 500’s total return for the first half of the year, including dividends, is 15.3%, according to S&P Dow Jones Indices data. Without Nvidia’s gains, the index’s total return would be 10.7%.
“High valuations will also need to be defended from rising uncertainty around monetary and fiscal policy, domestic and international elections, and geopolitical conflict,” wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in a Monday note.
How Japan’s newest yen note came from the Nepali mountains
Banks across Japan began stocking their ATMs on Wednesday with new yen notes made from paper sourced from an unexpected location — vibrant yellow flowering paperbush shrubs that grow in the Himalayan mountains of Nepal.
Before reaching Japanese consumers, the yen notes underwent a long, complex journey involving months of labor and transport by land and air across thousands of kilometers, reported by my colleagues Jessie Yeung, Hanako Montgomery, and Junko Ogura.
This process has provided a potential new income source for communities in one of the world’s poorest countries by supplying cash to one of its wealthiest.
Although Japan has been promoting digital payments in recent years, cash remains predominant, and the country lags behind other Asian nations like China, which have largely gone cashless.
“I really think that Nepal contributed to Japan’s economy, as cash is fundamental to the Japanese economy,” said Tadashi Matsubara, president of Kanpou, the company that produces paper for the Japanese government.
“Without Nepal, Japan would not function.”
Chinese government bonds are on fire. That’s ringing alarm bells in Beijing
Money is flooding into Chinese government bonds, sending their prices soaring and yields plummeting to record lows as investors seek a safer alternative to the country’s struggling real estate market and volatile stocks, reported by my colleague Laura He.
The yield on China’s onshore 10-year government bond, a benchmark for a wide range of interest rates, dropped to 2.18% this week, the lowest since 2002 when records began. Yields on 20-year and 30-year bonds are also near historic lows. Bond yields, the returns offered to investors for holding them, fall as prices rise.
Lower borrowing costs should be welcome in an economy struggling to recover from a property crash, weak consumer spending, and low business confidence. However, the sharp move in bonds is sparking talk of a bubble and causing significant concern among China’s policymakers, who fear a crisis similar to the collapse of Silicon Valley Bank (SVB) last year.
The People’s Bank of China (PBOC) has issued over 10 warnings since April about the risk of a bond bubble bursting, which could destabilize financial markets and derail China’s uneven economic recovery. In response, it is taking unprecedented steps to borrow bonds and sell them to reduce prices.
“SVB in the United States has taught us that the central bank needs to observe and evaluate the situation of the financial market from a macro-prudential perspective,” said PBOC Governor Pan Gongsheng at a financial forum in Shanghai late last month.
