The new earnings season for US stocks kicked off this week: US-Iran negotiations collapse, can the financial reports of banking giants boost market sentiment?

Notice that this week, the financial reports of major banks will be the focus of the agenda. JPMorgan Chase (JPM.US), Wells Fargo & Company (WFC.US), Bank of America (BAC.US), Citigroup (C.US), as well as investment banking giants Morgan Stanley (MS.US) and Goldman Sachs Group, Inc. (GS.US) will all announce their performance. In the tech world, Netflix (NFLX.US) is also expected to announce its first-quarter earnings. In contrast, the economic data calendar will be relatively quiet. Traders will also closely follow developments in the Middle East. In the Pakistani capital, Islamabad, negotiations between the US and Iran began on the morning of the 11th local time, ending after three rounds lasting 21 hours without reaching an agreement. US-Iran negotiations break down After nearly 21 hours of intense negotiations and consultations, on April 12th local time, the US and Iran issued statements stating that they had not reached a consensus and the negotiations were over. That day, US Vice President Pence said at a press conference that the US had made its "red lines" very clear, but Iran "chose not to accept US conditions"; Iran emphasized that "US overbearing demands hindered the establishment of a common framework and agreement". Currently, the timing, location, and plans for the next round of negotiations between Iran and the US have not been announced. On April 12th local time, US President Trump tweeted on social media that the US Navy would immediately begin blockading all ships attempting to enter or leave the Strait of Hormuz, intercepting and inspecting all ships paying passage fees to Iran in international waters, and clearing the mines that Iran had laid in the strait. Trump stated that Iran had promised to open the Strait of Hormuz but had not fulfilled this promise, and he said, Iran "knows how to end the current situation". Trump also stated that the US would blockade the Strait of Hormuz, which would take some time, but the clearing of the strait would not take too long. Trump said that NATO wanted to assist in handling affairs in the Strait of Hormuz, and the US was deploying more conventional minesweepers. On April 12th, US President Trump issued a new threat to Iran, saying, "At the appropriate time, we will be fully 'prepared,' and our military will end Iran's residual power." Economic data slump The two most important economic data points released last Friday have made investors uneasy on one hand US inflation reached its largest increase in four years, while consumer confidence hit a historic low. However, on the other hand, these two data points have also allowed investors to glimpse a potentially fleeting period. The Consumer Price Index (CPI) for March showed that overall prices rose by 0.9% last month, marking the largest single-month inflation increase since June 2022. This was mainly due to the surge in energy prices following the outbreak of the US-Iran war. Although the contours of this conflict are still fragile, the market hopes that oil prices, a major source of this inflation, may stop rising in the coming weeks. Similarly, the preliminary survey of consumer confidence at the University of Michigan for April showed that its index dropped to a historic low. However, almost all (98%) of the survey responses were collected before the ceasefire was announced last Tuesday. Oliver Allen, Chief US Economist at Pantheon Macroeconomics, wrote last Friday that the decline in confidence foreshadows a slowdown in consumer spending, "although the extent of deterioration it illustrates is not yet clear." Similarly, in a report following the CPI data release, Rick Rieder, Global Chief Investment Officer for fixed income at BlackRock, Inc., wrote that these readings "are not timing indicators but reflect pricing trends within a specific period." This means that, in Rieder's view, what is more important than single-month inflation data is: "the surge in oil, natural gas, and other industrial commodities (including helium and other gases) which implies for the global economy in the coming period." In other words, the market has long anticipated a surge in inflation, and consumer sentiments are not likely to be very positive. This expectation was confirmed on Friday. How the progress (or lack thereof) of the GEO Group Inc political conflict will affect these data and trigger extreme volatility will better explain why investors are initially concerned about these economic dynamics namely, how the economy will impact the next actions of the Federal Reserve. Oil prices Since the outbreak of the US-Iran war, the most important figure in the financial markets has been oil prices. As of last Friday, the price of WTI crude oil was slightly below $98 per barrel. Just before the war, this price was around $68. Looking ahead a few months on the futures curve, the price of oil traded for delivery in July is close to $85 per barrel. The current daily crude oil prices are based on the contract for delivery in May. Therefore, if the price of oil in July does indeed converge towards this pricing in other words, if the "oil price" drops by 15% the stock market may potentially return to historic highs. Julian Emmanuel, Head of Equity, Derivatives, and Quantitative Strategies at Evercore ISI, said, "We are using the WTI July contract as a benchmark. Our research suggests that with oil prices around $80-85 per barrel, emphasizing that the importance of oil on the economy and the stock market has decreased, is basically enough to not pose a substantial hindrance to the stock market." As shown this week, if oil prices stop rising, the stock market will start rising or at least stop falling. This is a simple logic until the situation changes. Dismal performance of software stocks In the latest stage of the artificial intelligence (AI) frenzy, the biggest losers have always been software stocks. And this sell-off continued to accelerate this week. The iShares Software Industry ETF (IGV) fell by over 7% last week. Year-to-date, IGV has cumulatively fallen by 30%. Of course, this number still conceals the more severe declines suffered by some of the fund's components. Stock prices of AppLovin (APP.US), Intuit (INTU.US), and ServiceNow (NOW.US) have all fallen by over 40% this year. The biggest "contributor" to the decline in IGV this year Salesforce (CRM) has declined by over 35% year-to-date. Microsoft Corporation (MSFT.US), Palantir (PLTR.US), and Oracle Corporation (ORCL.US) these stocks have also fallen by over 25% this year. Therefore, while the indexes depict a resilient stock market story, internal market differentiation has led to a cleansing of entire industry sectors. However, it is not all bad news for AI-related trading. For example, companies in the AI hardware sector have always been market leaders. The VanEck Semiconductor ETF (SMH) has risen by over 20% year-to-date. The fund's components include Intel Corporation (INTC.US), Applied Materials (AMAT.US), Lam Research Corporation (LRCX.US), and Marvell Technology (MRVL.US). Each of these stocks has risen by over 50% this year.