The stock market’s record highs are poised for a challenge in the upcoming week as a wave of corporate earnings reports and a fresh reading of the Federal Reserve’s preferred inflation gauge loom on the horizon.

As most financial institutions have wrapped up their reporting, the technology sector will take the spotlight with Netflix (NFLX) announcing its earnings on Tuesday, followed by Tesla (TSLA) on Wednesday.

The earnings calendar for the week is packed, including reports from Johnson and Johnson (JNJ), United Airlines (UAL), Verizon (VZ), and AT&T (ATT), making it one of the busiest weeks for quarterly reports on Wall Street.

On the economic front, the first estimate of fourth-quarter economic growth is anticipated on Thursday.

Simultaneously, the release of the Personal Consumer Expenditures (PCE) Index, the Fed’s preferred measure of inflation, is scheduled for Friday.

FILE PHOTO: A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan.

All-time highs

All this unfolds against the backdrop of stock markets trading at or near all-time highs.

The S&P 500 closed at 4,839 points on Friday, marking a fresh record high. Similarly, the Dow Jones Industrial Average reached a new closing peak of 37,863 points.

The Nasdaq Composite surged by 1.7% on Friday, making it a winner in the tech sector. All three major indices are currently in positive territory for January.

Stocks’ ascent to new highs came as consumer sentiment data from the University of Michigan revealed that consumers’ confidence in the economy is at its highest since July 2021.

The positive sentiment among consumers aligns with an increasingly optimistic outlook from Wall Street economists, as January continues to surprise with better-than-expected data.

Recent figures indicate that retail sales in December ended the year on a stronger note than previously feared.

Furthermore, despite headlines of layoffs across various sectors, the actual data for unemployment benefit claims reached its lowest weekly level since September 2022.

Resilient data

This resilient data has led analysts to predict that the U.S. economy grew at an annualised rate of 2% in the fourth quarter, in anticipation of the preliminary Gross Domestic Product release set for Thursday.

The experts at Oxford Economics are growing more confident that the economic expansion will persist into the year ahead. They point to a robust labor market, a slowdown in inflation, and looser financial conditions due to an expected pivot by the Fed toward rate cuts. These factors have reduced the odds of a recession in 2024 to less than 50%, according to Oxford Economics’ Matthew Martin and Ryan Sweet.

While economic growth remains a focus, the hot debate on Wall Street centers around the timing of potential interest rate cuts. As of Friday afternoon, investors assigned a 49% probability of a rate cut in March, a significant shift from the 81% likelihood just one week earlier.

Many economists believe that the path of inflation will be a key determinant of when the Fed decides to implement its first rate cut. Goldman Sachs’ chief economist, Jan Hatzius, predicts that the initial cut will occur in March.

Hatzius explains, “The driver of rate cuts in our forecast, and I would say in what Chair Powell said in the December press conference, is that inflation is coming back down to the target.

If inflation comes back down to the target, there will very likely also be rate cuts because the 5.37% federal funds rate is going to just seem very, very high relative to an economy that’s producing a 2% inflation rate.”

An update on the inflation situation is expected on Friday with the release of the PCE index for December. Economists anticipate that the annual “core” PCE, which excludes volatile categories like food and energy, will have reached 3% in December, with a monthly “core” PCE of 0.2%.

Rate cut

The Fed’s confidence in the trajectory of inflation is likely to increase based on the findings of this report, according to Bank of America US economist Michael Gapen, who also foresees a rate cut in March.

With the Federal Reserve in a blackout period ahead of its next meeting on January 30, earnings reports are expected to play a crucial role in shaping stock market sentiment in the upcoming week.