The new U.S. earnings season kicks off this week: U.S.-Iran negotiations break down, can bank giants' earnings boost market sentiment?

According to Zhitong Finance APP, this week, major banks' earnings reports will be the focus of the calendar. JPMorgan Chase (JPM.US), Wells Fargo (WFC.US), Bank of America (BAC.US), Citigroup (C.US), as well as investment banking giants Morgan Stanley (MS.US) and Goldman Sachs (GS.US) will all announce their results.

In the tech sector, Netflix (NFLX.US) is also expected to release its first-quarter results. In contrast, the economic data calendar will be relatively quiet.

Traders will also keep a close eye on developments in the Middle East. In Islamabad, the capital of Pakistan, US-Iran negotiations began at 11 a.m. local time on the 11th. After three rounds of talks over 21 hours, no agreement was reached.

Breakdown of US-Iran Talks

After nearly 21 hours of intensive negotiations and consultations, on April 12 local time, both the US and Iran issued statements saying no consensus was reached and the negotiations had ended. That day, US Vice President Vance stated at a press conference that the US side had made its "red lines" very clear, but Iran "chose not to accept the US conditions"; the Iranian side emphasized that "the US's excessive demands obstructed the establishment of a common framework and agreement." Currently, the time, location, and plan for the next round of US-Iran negotiations have not yet been announced.

On April 12 local time, US President Trump posted on social media that, effective immediately, the US Navy will begin blockade operations on all ships attempting to enter or leave the Strait of Hormuz, intercept and inspect all vessels paying transit fees to Iran in international waters, and clear Iranian mines in the Strait. Trump said Iran had promised to keep the Strait of Hormuz open but failed to fulfill this, stating that Iran "knows how to end the current situation."

Trump further stated that the US will blockade the Strait of Hormuz, which will take some time, but the clearing of the Strait will not take too long. Trump mentioned that NATO wishes to assist in handling affairs in the Strait of Hormuz, and the US is also deploying more conventional minesweepers.

On the 12th, President Trump issued a new threat to Iran, saying, "At the appropriate time, we will be fully 'ready,' and our military will end the remnants of Iran's forces."

Weak Economic Data

Last Friday's release of the two most important economic data points provided mixed signals for investors—US inflation saw its largest increase in four years, while consumer confidence hit a historic low.

On the other hand, these two data points also revealed what could be a fleeting period.

The March Consumer Price Index (CPI) showed that overall prices rose 0.9% last month, the largest monthly increase in inflation since June 2022. This was mainly due to soaring energy prices after the outbreak of the US-Iran war. Although the profile for the easing of this conflict remains fragile, markets hope that oil prices, as the main source of this round of inflation, may stop rising in the coming weeks.

Likewise, the preliminary survey of the University of Michigan's April consumer sentiment showed the index fell to its lowest point in history. However, almost all (98%) of survey responses were collected before the ceasefire was announced last Tuesday.

Pantheon Macroeconomics chief US economist Oliver Allen wrote on Friday that the decline in sentiment foreshadows a slowdown in consumer spending, "even though the exact degree of deterioration is still unclear."

Similarly, BlackRock Global Fixed Income CIO Rick Rieder wrote in a report after the release of the CPI data that these readings "are not point-in-time indicators, but reflect pricing trends over specific periods."

This means, in Rieder's view, more important than the single monthly inflation figure is: "What does the surge in oil, natural gas, and other industrial commodities (including gases such as helium) mean for the global economy in the period ahead?"

In other words, the market had already anticipated a surge in inflation, and consumers were not expected to feel good. This expectation was confirmed on Friday.

How these data points react (or do not react) to the development of extreme volatility caused by geopolitical turmoil will better explain why investors first cared about economic dynamics—namely, how the economy will affect the Federal Reserve's next move.

Oil Prices

Since the outbreak of the US-Iran war, the most important number in the financial markets has been oil prices.

As of last Friday, the price of WTI crude was just below $98 a barrel. On the eve of the war, it was about $68.

Looking along the futures curve for several months ahead, July crude delivery is trading near $85. The current daily oil quote is for contracts delivered in May.

Therefore, if July oil prices indeed approach that level—in other words, if "oil prices" fall by 15%—then the stock market may return to historical highs.

Julian Emanuel, head of US equity, derivatives, and quantitative strategy at Evercore ISI, said: "We are taking the WTI July contract as a benchmark. Our research shows that, given the declining importance of oil to the economy and the stock market, a WTI price around $80–85 is basically enough not to pose a real hurdle for stocks."

As shown this week, if oil prices stop rising, the stock market will begin to rise—or at least stop falling. That's the simple logic until things change.

Poor Performance of Software Stocks

In the latest phase of the artificial intelligence (AI) boom, software stocks have been the biggest losers. And this selloff has continued to accelerate this week.

The iShares Software Sector ETF (IGV) fell more than 7% last week. IGV is down 30% for the year. Of course, this figure still masks the even steeper declines suffered by some of the fund’s components.

Shares of AppLovin (APP.US), Intuit (INTU.US), and ServiceNow (NOW.US) are all down over 40% so far this year.

The stock that contributed most to IGV's decline this year—Salesforce (CRM)—is down more than 35% for 2023.

Microsoft (MSFT.US), Palantir (PLTR.US), and Oracle (ORCL.US)—each of these stocks is down over 25% this year.

Thus, while the index paints a story of a resilient market, internal sector divergence has led to an overall wipeout of the sector.

However, it’s not all bad news for AI-related trades. For example, companies involved in AI hardware have remained market leaders; the VanEck Semiconductor ETF (SMH) is up more than 20% year-to-date.

The fund’s components include Intel (INTC.US), Applied Materials (AMAT.US), Lam Research (LRCX.US), and Marvell Technology (MRVL.US), each of which is up more than 50% this year.