CAC 40: Navigating High Risks Ahead of Earnings Season

Paris Stock Exchange is expected to start the week lower, with the CAC 40 index futures down 24.5 points. U.S. markets are bracing for a critical earnings season, with major banks set to report, amid concerns over Federal Reserve rate cuts. Earnings projections show an 11.7% increase for S&P 500 firms, yet uncertainties around inflation and Donald Trump’s policies could impact market performance. Gold is gaining investor interest, while oil prices rise due to new sanctions on Russia.

Paris Stock Exchange Set for a Cautious Start

The Paris Stock Exchange is anticipated to open lower on Monday as investors take a breather following last week’s significant rebound, while also preparing for the commencement of the quarterly earnings season.

As of 8:15 AM, the CAC 40 index’s futures contract, set to expire at the end of January, is down by 24.5 points, bringing the index to 7410 points. This suggests a rather tentative beginning to the week.

On Friday, the Paris market concluded the session down by 0.8% at 7431 points. However, it still managed to end the previous week with an impressive gain of over 2%, a performance that notably diverged from the trends observed on Wall Street.

U.S. Markets Brace for Earnings Reports

U.S. stock markets have seen a second consecutive week of losses, averaging around 2%, as concerns grow regarding future rate cuts from the Federal Reserve. This week is critical for Wall Street, featuring the release of quarterly results from several major players in the U.S. economy, which will likely influence market sentiment in the days to come.

Attention will be focused on major U.S. banks during this first week of earnings announcements, with reports from Citi, Goldman Sachs, JPMorgan, and Wells Fargo scheduled for Wednesday, followed by Bank of America and Morgan Stanley the following day. Insights from these financial powerhouses will offer investors a clearer picture of the current economic landscape, consumption trends, and forecasts for the U.S. economy.

According to FactSet, earnings for companies in the S&P 500 index are projected to rise by an average of 11.7% year-on-year in the fourth quarter, marking the most substantial increase since late 2021. However, as indicated by solid employment figures released last Friday, positive statistics alone may not be enough to propel the market upward, as they suggest a reduction in monetary easing.

The earnings season will be crucial in determining whether the New York Stock Exchange can regain its upward trajectory, especially considering that the S&P 500 is currently trading at 21.5 times its earnings, significantly above the ten-year historical average of 18.2.

Nonetheless, the upcoming earnings reports will not completely overshadow ongoing developments across the Atlantic, amid uncertainties about Donald Trump’s future policies, rising inflation, and tensions surrounding bond yields. Long-term U.S. rates hit new highs last Friday, following a stronger-than-expected employment report.

Market participants will closely watch the inflation statistics for December set to be released on Wednesday. A figure surpassing expectations could exert upward pressure on U.S. bond yields, adversely affecting stock market performance.

The consumer price index (CPI) recorded a year-on-year increase of 2.7% in November, slightly up from 2.6% in October, remaining well below the Fed’s 2% target. The earnings season kicks off amid rising trade uncertainties just a week ahead of Donald Trump’s inauguration, who is poised to become the 47th president of the United States.

Trump’s aggressive stance on international trade has raised significant concerns among investors, contributing to the ongoing correction in U.S. stocks and the rise in rates, spurred by indicators showcasing the resilience of the U.S. economy.

The president-elect has proposed imposing substantial tariffs on all imported goods to the United States, a policy that could ignite inflation and limit the Fed’s ability to act. During his campaign, he suggested tariffs as high as 60% on Chinese goods and 10%-20% on products from other nations.

Implementing ‘universal’ sustainable tariffs may negatively impact stock performance, particularly for sectors like retail, automotive, technology, semiconductor manufacturing, and specific industrial groups.

Given these uncertainties and the less appealing valuations, investors are contemplating whether it’s time to take profits on U.S. stocks, wary of a potential major correction in the upcoming months. Goldman Sachs strategists recently noted a 30% probability of a global stock market drop of at least 10% within three months, and over 20% within a year.

In this environment, gold is regaining interest among investors, approaching its historical highs from over two months ago. Meanwhile, oil prices are also trending upward following the Biden administration’s announcement of new sanctions on the Russian energy sector. This morning, Brent crude surged by over 1.6% to $81.1 per barrel, while U.S. light crude (WTI) rose by 1.8% to nearly $78, reaching levels not seen since October.

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