The market's next big test will be during earnings season, with value stocks in the spotlight in the week ahead.

• In the upcoming week, earnings season gains momentum as major financial institutions, such as Goldman Sachs and Bank of America, release their reports, alongside companies like Procter & Gamble, Netflix, and numerous transport names.
• The earnings period could prove whether investors' theory that value and cyclicals will outperform tech is correct.
• Due to the Federal Reserve officials' quiet period before their two-day meeting starting Jan. 25, the Treasury market may experience reduced activity during the four-day week.

In the upcoming week, the market's attention will shift towards fourth-quarter earnings, with economically sensitive stocks predicted to show stronger profit growth compared to technology players.

The earnings period will provide a test of the theory that value and cyclicals will outperform tech stocks, while also giving investors a glimpse into how companies are managing inflation, which increased by 7% on an annualized basis in the final month of 2021, as measured by the consumer price index.

According to Jonathan Golub, Credit Suisse's chief U.S. equity strategist, earnings are predicted to increase by 20% annually. However, it is likely that the companies will surpass this expectation and achieve growth of 25% to 30%.

"The cyclical sectors, energy, materials, industrials, and discretionary are predicted to grow by 95% to 100%, while everyone is expected to outperform tech," he stated.

The technology sector in the S&P index is predicted to experience a 11% increase in earnings, according to Golub's projections.

These old economy companies are predicted to have better earnings growth in terms of energy, materials, and industrials not only in the present quarter but also in subsequent ones, according to him.

The materials and industrials sectors are projected to experience significant earnings growth of 62% and 52%, respectively. Energy profits are anticipated to increase substantially due to their negative performance in the previous year. The consumer discretionary sector, excluding internet retail, is expected to achieve earnings growth of 33.9%, while the financial sector, categorized as cyclical stocks, is forecast to see profits rise by only 2%.

Inflation has winners and losers, with the biggest beneficiaries being the companies that perform well in this environment. According to Golub, the excitement in the market should not be centered on tech companies, as they have only achieved 10% growth this year, while others are performing much better.

Golub stated that earnings forecast revisions have supported cyclical sectors, with cyclical earnings growth estimates increasing by 9.5% since September. In contrast, tech sector earnings growth estimates have decreased by 1.6% since September.

The earnings season is in full swing, with several major banks reporting on Friday. In the week ahead, a range of sectors will release their earnings, including Netflix, consumer brand giants like Procter & Gamble, and transportation companies such as United Airlines and FedEx.

JPMorgan fell more than 6% Friday on its disappointing outlook, which included a warning about headwinds from wage inflation. While , and beat estimates when they reported Friday, their stock performance was mixed.

According to Steve Sosnick, Interactive Brokers' chief strategist, we will obtain greater clarity from companies in the industrial and cyclical sectors, particularly those that can withstand price pressures and supply chain challenges. He believes that well-managed companies will fare well.

Stocks tied to bonds

Sosnick stated that he anticipates technology will continue to be linked to any significant fluctuations in the market, which was approximately 1.79% late Friday, slightly below its recent peak of 1.8%.

The 10-year yield increased early in the year due to the Federal Reserve's hawkish stance, which was reiterated at its December meeting. The central bank also discussed shrinking its balance sheet, which could lead to additional policy tightening from a Fed that is already signaling three interest rate hikes this year.

Despite industrials and materials declining by 0.6% each for the week, technology remained flat but still outperformed financials, which fell 0.8%. Energy was the only positive sector, increasing by 5.2%.

As of Friday afternoon, the was 0.3% off for the week, while the S&P 500 also experienced a 0.3% decline. The Dow, however, had a larger drop of 0.9%.

In the week ahead, the Treasury market may experience lower activity due to the closure of markets on Monday for Martin Luther King Jr. Day.

Fed officials have entered the quiet period before their Jan. 25-26 meeting, according to Michael Schumacher of Wells Fargo.

Schumacher stated that the 10-year and 30-year Treasury auctions have concluded, and it appears that the significant events have occurred for the near term. He believes that it will be a calm week, and the 10-year Treasury bond is likely to remain stable.

The Fed's Empire State manufacturing survey and the Philadelphia Fed manufacturing survey are both scheduled for Tuesday and Thursday, respectively. Additionally, existing home sales will be reported on Thursday.

Sosnick anticipates that the volatility will persist and technology will continue to be criticized. He stated, "I believe we're returning to a growth rate that is reasonable."

Week ahead calendar

Monday

Markets closed for Martin Luther King Jr. Day

Tuesday

Earnings: Bank of New York Mellon, Truist Financial, Interactive Brokers

8:30 a.m. Empire State manufacturing

10:00 a.m. NAHB survey

4:00 p.m. TIC data

Wednesday

The earnings of Bank of America, US Bancorp, Alcoa, Discover Financial, FNB, Fastenal, Prologis, and Comerica were reported.

8:30 a.m. Housing starts

8:30 a.m. Business leaders survey

Thursday

Baker Hughes, Fifth Third, CSX, Regions Financial, Earnings:

8:30 a.m. Initial jobless claims

8:30 a.m. Philadelphia Fed manufacturing

10:00 a.m. Existing home sales

Friday

Earnings: Schlumberger, Huntington Bancshares