Stocks are pricing in more earnings erosion after first batch of reports

Published Wed, Jan 18 202312:38 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The "soft" part of a potential economic landing is increasingly visible. More weak manufacturing data combined with subpar retail sales and strong downside momentum in producer prices have bonds rallying and questions flaring about the Federal Reserve's resolve for getting short-term rates to or above 5% as officials continue to insist. Stocks trying to digest, with some difficulty, the slow macro clues along with the 4% S & P 500 jump in the year's first two weeks and the huge rip in riskier parts of the market – left-for-dead speculative tech, heavily shorted names, companies with dicey balance sheets. At 4,000 on the S & P 500, fewer things can safely go wrong without spurring the sellers than at 3,700. And if it were to get up toward the "exit velocity" readings above 4,300, presumably the market would be betting pretty firmly on a benign economic/earnings/Fed outlook. There's certainly room to pull back a bit more before undoing the four-week upward push. A little shakeout down toward 3,900 could refresh buying interest given investors surely seem to have entered the year underexposed to equity risk. Some encouraging tale-of-the-tape metrics from the past couple of weeks are still worth heeding, a few "breadth thrust" momentum indicators triggered and some emerging cyclical-stock outperformance pushing against the calls for a quick and sharp slide into an economic downturn. Still, if this rally were going to be yet another counter-trend move to fail at the downslope line from the January 2022 peak, this is about where it would do so. The burden of proof remains on the bulls and the economic optimists, even if a 1995-style flawless soft-landing scenario hovers out there as a possible if not probable potential outcome. It's a tricky moment given that bonds say the Fed is, or should be, just about done, with an ever-more-steeply inverted yield curve (six-month bills the highest yield on the board at 4.83%, down to 3.41% on the 10-year), yet credit markets behaving quite well and Fed pauses (assuming one comes soon-ish) have tended to be generally supportive of risk assets for a while. Earnings are yet again a give-and-take proposition, too early to draw broad conclusions but in general a bit of a downside tilt. Stocks themselves have done some work to price in further risk of profit erosion, but surely not in all cases. A collapse in yields is promising to stem the slide in housing activity a bit, with NAHB sentiment clicking higher off depressed levels and the iShares U.S. Home Construction ETF now ahead of the broad market on a one-year basis, even. Market breadth moderately negative today but no washout yet, maintains the generally firmer footing its enjoyed this month. The VIX is lifting off the lows, still 20-ish, Earnings season can restrain index-level volatility (single-stock moves offsetting one another more), which in turn can mean VIX might also remain subdued, all else being equal.