The shaky stock market is barreling towards key tests with bank earnings, inflation data on deck

The two biggest questions hanging over the stock market will take center stage next week as Wall Street tries to steady itself after a volatile start to October. One key test is corporate earnings, as the third-quarter reporting season kicks off. JPMorgan , Morgan Stanley and other major banks are reporting their numbers, while Delta Air Lines is one of the headliners outside of the financial sector. Sentiment heading into earnings is low and getting worse. John Butters of FactSet said in a note on Sept. 30 that the third quarter had already seen the biggest earnings estimate cuts for S & P 500 companies in more than two years, But many on Wall Street think estimates are still too high, both for this quarter and the upcoming ones where a recession seems likely. “If there’s one disconnect, it’s that the expectations haven’t come down enough,” said Nick Raich of The Earnings Scout, pointing to the fourth quarter and 2023 as key areas to watch. “I think we’re going to see overall earnings expectations fall maybe 10% or 15% this earnings season. They only fell like 2% last earnings season. So that means the negative revisions are going to accelerate to the downside,” he added. The earliest earnings results have not been pretty. Raich said that, as of Thursday, 20 S & P 500 companies had already reported, and five had seen their stock fall more than 20% in the aftermath. Advanced Micro Devices then joined the party on Thursday evening, warning that its revenue would miss for the third quarter and sending its stock tumbling on Friday . Even with general investor pessimism and a widespread belief that earnings results are too high, the early reporters show that third quarter reports can still cause big swings. “Disappointing earnings won’t be a surprise, the question is whether those earnings will disappoint investors,” Frank Gretz, a technical analyst at Wellington Shields, said in a note to clients. “How much bad is priced in?” Inflation Outside of earnings, inflation will be a major focus for investors next week. Two key reports are due up, with the producer price index on Wednesday and the consumer price index on Thursday. The U.S. economy is currently being buoyed by its resilient labor market , but many economists fear the Federal Reserve’s fight against inflation could result in a recession . “We’re at the point right now where I think that the inflation data are more important than the labor market data, in that until the inflation data moderates the Fed won’t feel comfortable slowing,” Eric Winograd, director of developed market economic research at AllianceBernstein. There have been some signs that lower inflation is coming down the pipeline, with prices paid components of manufacturing surveys falling and burgeoning signs that the rental market is beginning to roll over like the housing market before it. But those numbers have not yet shown up in the Fed’s main inflation metrics, and the central bank has said it wants to see multiple months of declining inflation before changing course. “Inflation, inflation, inflation. We need to see evidence that price pressures are easing. I think there’s good evidence that the economy is starting to slow, but it’s going to take more than what we’ve already seen to bring inflation back down,” Winograd said. Week Ahead Calendar Monday 1:35 p.m. Fed Vice Chair Lael Brainard Tuesday 6:00 a.m. NFIB Small Business Index Wednesday Earnings: Pepsico 8:30 a.m. Producer Price Index 1:45 p.m. Fed Vice Chair Michael Barr 2:00 p.m. Treasury budget 2:00 p.m. Fed minutes 6:30 p.m. Fed Governor Michelle Bowman Thursday Earnings: Delta Air Lines, Walgreens Boots Alliance, Domino’s, BlackRock, Fastenal, Commercial Metals 8:30 a.m. Jobless claims 8:30 a.m. Consumer Price Index Friday Earnings: JPMorgan Chase, Wells Fargo, Morgan Stanley, Citigroup, UnitedHealth Group, PNC Financial, US Bancorp, First Republic Bank 8:30 a.m. Import/Export data 8:30 a.m. Retail sales 10:00 a.m. Business inventories 10:00 a.m. University of Michigan consumer sentiment