Market Insider

Caution prevails on Wall Street ahead of earnings, Fed

Investors cautious ahead of earnings, Fed minutes
Investors cautious ahead of earnings, Fed minutes

Tuesday could easily be an echo of Monday on Wall Street, with investors on edge a day ahead of the unofficial start of earnings season and the release of minutes from the Federal Open Market Committee.

On course to end bond purchases that helped prop up the U.S. economy through the recession, the Federal Reserve is also pondering the timing and pace of what would mark the central bank's first interest-rate hikes since 2006. The Fed publicizes minutes from its September meeting Wednesday, three weeks ahead of gathering again.

The FOMC release will also draw particular attention in that it precedes the Federal Reserve's meeting at the end of the month, at which the central bank is expected to "officially end the taper program, and then everyone gets to wring their hands about when they start raising rates," said Paul Nolte, portfolio manager at Kingsview Asset management.

Trader on the floor of the New York Stock Exchange.
Getty Images

"Investors are going to parse everything which way from Tuesday in trying to figure how aggressive are they going to be," said Nolte of the rate increases generally expected to start sometime in 2015.

The likely path for the Fed was not made any clearer by Friday's monthly jobs report, which had the jobless rate dropping to a six-year low in September, and the participation rate declining to its lowest since early 1978. Average hourly wages held flat.

"Wage growth still stinks—that allows the Fed to not raise rates all that aggressively," Nolte said.

Another reference point, an updated estimate of Labor Market Conditions released Monday by the Fed, was also viewed as unlikely to put any pressure on the Fed to move up its timetable for rate increases.

The Federal Reserve's labor-market conditions index, which combines 19 variables, climbed to 2.5 in September, from 2 the month before.

"What this tells usmore importantly, what it tells the Fed—is that the labor market is improving less rapidly today than just a few months ago," Dan Greenhaus, chief strategist at BTIG, wrote in emailed commentary.

Given the index's "new" nature, it's hard to interpret what this might mean for Fed policy. But, "for the casual investor and trader, Monday's report is 'less than expected' but given the Fed's hesitancy on labor-market conditions in general, it merely reinforces the Fed's 'take-it-slow' approach to monetary policy," Greenhaus said.

Read MoreHere's why Brazil stocks are soaring today

Further out, the next two weeks will likely see a shift in focus from the global economy to corporate earnings, with aluminum-producer Alcoa scheduled to report third-quarter results on Wednesday.

"Investors will want to see whether earnings are still coming through and can support the market at current levels," said Nolte, who expects a 5 percent to 6 percent range for earnings growth, an outcome that "still leaves valuations for the on the high side of historical norms."

"I don't see huge gains in the marketplace that will come on the heels of earnings," said Nolte, who believes the S&P 500 will end the year at around 2,100.