Inflation Concerns and Earnings Season: A Look Ahead to 2024

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As we embark on the journey into 2024, investors find themselves entering a week filled with trepidation, given the lackluster performance of equities and the impending release of crucial inflation data, alongside major bank earnings reports. Barclays' downgrade of Apple earlier in the week and robust employment figures are intensifying concerns of overbought equities, while casting uncertainty on the Federal Reserve's interest rate trajectory.

For investors, as Chris Larkin notes, the name of the game is patience. Rate cuts are still on the table, but investors may need to wait until the second half of the year. The Federal Reserve has made it clear that it stands ready to raise interest rates if it perceives inflation making a resurgence.

Historically overshadowed by employment data in terms of market significance, inflation data has gained increasing importance, particularly with the Federal Reserve's willingness to act on inflation control. Investors are keenly observing the data as the Federal Reserve strives to bring inflation down to its 2% target.

Thursday will see the release of the December Consumer Price Index (CPI), expected to confirm the recent moderation in inflation trends. Economists polled by FactSet anticipate a 0.2% increase in inflation for the past month. While a higher increase than November's 0.3% is anticipated, it is still lower than the prior month's figure, implying an expected rise in annual inflation from 3.1% to 3.2%.

Joe Kalish, Chief Global Macro Strategist at Ned Davis Research, believes that an inflation reading exceeding expectations could be met with unease by the markets.

Furthermore, investors are urged to keep a watchful eye on rising oil prices in the wake of recent Middle East conflicts. On Wednesday, oil prices surged by over 3%.

Kalish remarked, "We've seen inflation expectations fall on lower oil prices. If the situation reverses, it could cast doubt on the narrative of falling inflation in line with the Fed's targets." Thus, all eyes remain on inflation.

Earnings Season Kicks Off with Big Banks

Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo are set to release their earnings reports at the end of this week. JPMorgan's shares reached record levels after being dubbed the top banking pick for 2024 by Goldman Sachs.

With earnings season commencing on January 12th, analyzing expectations becomes crucial. Despite the ongoing possibility of a recession in 2024, consensus forecasts point towards a robust profit increase of 11.8% for the S&P 500. This figure exceeds the average annual profit growth rate of 8.4% over the past decade.

A separate profit increase is anticipated for each quarter of 2024: 6.8% for Q1, 10.8% for Q2, 9% for Q3, and a staggering 18.2% for Q4.

The Lingering Nightmare of Last Week's Employment Data

December saw an employment increase of approximately 216,000 in the United States, surpassing expectations of a 170,000 gain. What truly captured attention, however, was the significant wage growth, exceeding 4% compared to the same period last year. While this may help Americans cope with rising prices, it could lead companies to continue raising their price tags, fueling an inflationary spiral and prolonging the nightmare of higher interest rates by the Federal Reserve.

Morgan Stanley's 2024 Picks

Morgan Stanley analysts have identified certain stocks that they believe could shine in 2024.

Spotify $SPOT

T-Mobile $TMUS

Howmet Aerospace $HWM

BlackRock $BLK

UnitedHealth $UNH

Morgan Stanley sees Spotify as the top choice for this year. Analyst Benjamin Swinburne anticipates that price increases and optimized royalty payments in the music streaming industry will bring more positive news. Spotify's long-term global growth trajectory and distinctive earnings outlook are emphasized, with Spotify shares having surged by 137% in the past year.

Additionally, based on wireless growth potential, Morgan Stanley prefers T-Mobile for 2024. The company is said to be poised for market share gains and boasts a robust capital return program. T-Mobile continues to reap the benefits of its 2020 merger with Sprint.

Analyst Simon Flannery adds that T-Mobile is expected to conduct a share buyback of approximately $12 billion in 2024, with a larger program slated for the following year. T-Mobile shares have risen by 13% in the past year.

Morgan Stanley regards Howmet Aerospace as the prime choice in the aerospace sector for 2024. Analyst Kristine Liwag notes that the company's presence in both original equipment manufacturing and the aftermarket provides a competitive edge. Howmet is highlighted for its strong management team and its ability to offer a favorable blend of growth and quality. Howmet shares have seen an approximately 37% increase in the past 12 months.

Lastly, Morgan Stanley includes BlackRock as a top pick, owing to expectations of renewed flows into fixed income, given exposure to growth opportunities such as indices, ESG, private markets, and technology revenues.

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