Investing.com - A fresh batch of quarterly earnings from several Wall Street banks are due to test the optimism in stock markets following President-elect Donald Trump’s November victory, according to analysts at Bank of America.
Equities initially surged after the ballot, spurred on by hopes that Trump would roll out more pro-business policies like looser regulations and tax reductions.
But the rally has since showed signs of fading, weighed down in part by a spike in US Treasury yields stemming from waning expectations for potential Federal Reserve interest rate cuts this year.
The central bank previously slashed rates by a full percentage point in 2024. However, concerned by the possible inflationary impact of Trump’s plans, including the imposition of strict import tariffs on allies and adversaries alike, Fed officials have said they will approach further drawdowns in borrowing costs carefully. Last week’s blockbuster jobs report -- and the implications it could also have on price growth -- dented the outlook for cuts as well.
Indeed, the 30-stock Dow Jones Industrial Average, which initially rallied after Trump’s presidential election victory, is now down by 0.7% since Nov. 5. The small-cap-focused Russell 2000 index has dropped into correction territory, down by 10% versus a recent closing high notched in late November.
This week, along with monthly US inflation data, sentiment could be swayed by quarterly returns from banking giants, which are set to kick off the quarterly earnings season.
JPMorgan, Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and Goldman Sachs are anticipated to report on Wednesday, followed by Bank of America and Morgan Stanley (NYSE:MS) on Thursday. Robust deal volumes are expected to help boost the results, although scrutiny is still projected to center around net interest income -- or the difference between what banks pay for deposits and make from loans.
Across companies in the benchmark S&P 500, profits are projected to have climbed nearly 10% in the quarter from a year earlier, according to LSEG IBES data cited by Reuters.
"This earnings season will be crucial," the Bank of America analysts wrote in a note to clients. "We expect a more upbeat tone with accelerating post-election trends, but guides are likely to be conservative as usual in January-February."
Meanwhile, options markets are pricing in "big reactions" to the earnings, with an average 4.7% implied move in stocks following company results, the analysts flagged.
"It’s a stock picker’s earnings season once again," they said.
(Reuters contributed reporting.)