Earnings Season To Push Financial Sector To New Highs? XLF Analysis And Forecast

Stock investors are treading cautiously ahead of upcoming critical economic data and the “unofficial” start of the Q4 2021 earnings season this week. Bulls mostly believe the sell-off that followed the Fed’s “minutes” last week was overdone and largely a knee-jerk reaction to information that investors already knew. The biggest shock seems to be the confirmation that the Fed is looking to start reducing its balance sheet as soon as this year. St. Louis Fed President James Bullard said that he favors starting to shrink the central bank’s balance sheet shortly after the first rate hike, which he said could come as soon as March.

Senate Banking Committee

Investors hope to get more details this week from Fed Chair Jerome Powell and Fed Governor Lael Brainard at their confirmation hearings before the Senate Banking Committee, where both are expected to get pressed pretty hard about how the central bank intends to counter inflation.

Powell is up first on Tuesday, January 11, followed by Brainard on Thursday, January 13. Brainard is being considered for the Vice-Chair seat. It wouldn’t be surprising to see bulls stick close to the sidelines ahead of those testimonies and possibly even a bit into the start of earnings season.

It’s worth noting that some of the biggest stock declines this week have been those viewed as “riskier” stocks like unprofitable tech companies with lofty valuations and some of the meme-driven trades.

Generally speaking, the prospect of higher interest rates very shortly means high-growth companies-aka heavily dependent on debt-are facing lower profits as the cost of maintaining that debt/growth rises. That means the Q4 earnings season could bring about a reckoning for companies that are viewed as overly leveraged, with Wall Street growing more worried about how they are going to perform in a higher rate environment. At the same time, bulls believe companies that can continue to expand along with the economy will ultimately help drive stock prices even higher in the quarters ahead.

Earnings season unofficially kicks off this Friday, January 14, with big Wall Street banks JP Morgan Chase JPM, Citigroup C, and Wells Fargo WFC. Looking ahead to this week, key data includes Wholesale Inventories on Monday; the December Consumer Price Index on Wednesday; the Producer Price Index on Thursday; and Retail Sales, Industrial Capacity, Business Inventories, and Consumer Sentiment on Friday.

XLF to reach 43.50p and more?

XLF is now the leading sector of the SP500 Index. Moreover, it has all the chances to show outstanding performance in the next 4 – 8 weeks. The accumulation is quite good in this ETF. Besides, the financial sector has a strong seasonal and cyclical tendency to rally in January and February. Indeed, a lot depends on the Q4 earnings.

The banks showed excellent results in the previous three quarters. So, I expect the same now. Also, after XLF has built support near 73, it should text the next critical Gann level at 43.5 (in extension 46).