“Who’s in charge?” may become one of the defining questions of 2024: Think, “Who’s in charge of the White House?” or “Who’s running the Federal Reserve?”  

This question is also equally relevant to last week’s market action. Not so long ago, the answer to who (or what’s) in charge of short-term market performance was a simple one: inflation. 

Those days are gone. I argued last week that barring any big surprises, inflation is now returning to its rightful place as a non-combatant in the battle for the short-term market narrative. Last week’s experience would seem to bear that out: On Thursday, the Bureau of Labor Statistics reported that inflation at the consumer level was hotter than expected.¹ Markets tried hard to drop after the release and at one point were off their pre-Consumer Price Index (CPI) peak by as much as -1.2%. But by the end of the day, stocks had recovered all that lost ground and ended up almost exactly where they started. Then on Friday the whole thing repeated itself, but in reverse: Prices at the producer level came in lower than expected and markets tried hard to rally, but again ended the day almost perfectly flat.²  

It’s probably safe to say that inflation data has mostly outlived its time in the spotlight (again, barring something unexpected). But what about the Fed? Inflation is mostly relevant because of the feedback loop that lies between it and Fed policy, so a tweak in Fed policy or a slight change in the trajectory of market expectations regarding it used to carry a lot of weight. Lately, not so much: After Thursday’s CPI release, Federal Open Market Committee (FOMC) participant and new voter Loretta Mester commented that the hotter-than-expected data was enough to convince her that a rate cut in March would be premature – clearly opposed to market expectations, which still overwhelmingly favor a cut of at least 0.25%. But that did very little to move the needle for stocks, which, to review, finished Thursday unchanged. 

Then on Friday, we again got the inverse. A slightly friendlier Producer Price Index (PPI) release was accompanied by yet another re-rating in market expectations about when the Fed might be in a position to lower rates: When the week started, traders were assigning roughly a 68% chance³ that the Fed would cut rates before all of last week’s snow had finally melted; by Friday, that had risen above 80%. But again, no real love from the market, which ended Friday mostly unchanged.  

Okay, I know what some may be thinking: Of course it’s not inflation, of course it’s not the Fed; what’s moving markets right now is the Magnificent Seven – that group of mega-cap technology stocks that powered last year’s rally. And while some might argue that the performance of those seven superstocks and its relationship to broad market performance is more a symptom of their immense gravity than anything more fundamental in nature, here’s the point: The relationship between the Magnificent Seven and the broader market was strongly positive in calendar year 2023 and remained so last week, with last week’s pairwise returns falling pretty close to the regression line. But underneath the surface, some disagreements have emerged: The dispersion among the Magnificent Seven is strikingly large so far in 2024. 

This brings us back around to our initial question: If it’s not inflation, the Fed, or the Magnificent Seven that determines where markets are headed, then what is it? Here’s a novel thought: What if it’s earnings? That idea feels oddly out-of-place because it’s been so long since it was true, even though traditional investment theory would argue that fundamental value is ultimately always about earnings. But so far here in 2024, it’s beginning to look like that traditional relationship between what companies earn and what they’re worth in the open market may finally be reasserting itself. 

Case in point: Last Friday marked the unofficial kick-off to earnings season with a slate of large banks and a handful of other companies issuing fourth-quarter results, as well as their outlooks for the future. So far, it’s hard to divine any common themes: Just about everyone with a significant market cap who reported last week beat expectations easily. But there were clear differences in how they got there, as well as what they’re seeing in the year ahead. And generally, those that saw their stocks perform well in post-results trading not only beat expectations but were also optimistic about 2024. Those that did poorly either struggled with challenges like rising costs on their way to the fourth quarter’s beat, provided disappointing guidance for the months ahead, or both. 

And that’s exactly as it should be. But it’s still kind of odd to see things work the way they “should” for a change. 

And remember, that could be good news or it could be bad: If companies are able to endure whatever economic softness that lies ahead and maintain solid profitability, then things should be just fine in 2024. But on the other hand, if surprises like unsustainable growth in the cost line continue to appear, or if forward guidance turns more consistently bearish, 2024 could be rocky indeed. 

What to watch this week 

Earnings season continues to sputter to life this week, with the focus remaining squarely on financials. Tuesday’s releases from Goldman Sachs, Morgan Stanley and PNC Bank will round out last week’s results from other notable financial firms, as will Wednesday’s releases from US Bancorp and Charles Schwab, among others.

Last week’s bank results did not produce a consistent read-through into the macro, with some firms upbeat about 2024 and others far less sanguine. That expressed itself in disparate views on how well interest margins will hold up if and when interest rates begin to decline in earnest, as well as how resilient borrowers have been in the face of rising uncertainty and the impacts of shifting regulatory requirements. Look for line items such as credit loss provisions and customer attrition rates inside this week’s reports for color on those items. 

Another earnings result from last week that I neglected to discuss above was that of entry-level and mid-market homebuilder KB Homes. Like virtually all the banks and financials that reported last week, KB beat current expectations easily. But that earned its stock very little in terms of goodwill, because markets instead focused on slower sales and a decline in average selling prices (ASPs) to send the shares lower. That last part — lower ASPs — could ironically be good news for the industry in the long run because it might help restore home affordability to something slightly below impossible. We’ll get more background this week in the form of the National Association of Homebuilder’s sentiment report (which has improved recently but remains overtly depressed), as well as existing home sales and starts/permits data toward the end of the week. As I’ve mentioned before, a surprise uptick in housing could be a positive driver of macroeconomic performance this year, but only if these types of metrics start to improve soon.  

Ditto for the consumer, which could become another big macro story this year. I’ve long thought that the consumer is likely over-extended, but Americans have continued to prove me wrong (and last week’s bank earnings were notably inconclusive on that score). This week we get retail sales for December (on Wednesday) and the latest mid-month read on consumer sentiment from the University of Michigan (Friday). If consumers are indeed able to maintain their momentum this year, in my view it would represent an out-of-consensus, positive surprise for markets that could provide fuel for additional gains. I wouldn’t bank on it, but this week may provide incremental information on how likely a scenario like that might be. 

Meanwhile, a trio of reports relevant to the goods-producing sector of the economy are due out this week: Our first two regional Fed manufacturing reports – Empire State on Tuesday and Philly Fed on Thursday – as well as the Fed’s industrial production and capacity utilization report sandwiched between them on Wednesday. Here the story is fairly well-known: Manufacturing – which is heavily cyclical and therefore usually correlates well to macroeconomic trends more generally – remains clearly in contraction mode.