The earnings season, which began earlier this week, is off to a strong start, with most companies reporting solid results and raising their guidance. 

At the same time, expectations for a Federal Reserve interest rate hike have eased after the United States released encouraging consumer and producer inflation data. So why are the Dow Jones, S&P 500 and Nasdaq 100 indices still falling?

Earnings Season Has Started on a High Note

The earnings season has started well, with a FactSet (NYSE:FDS) report showing that the average earnings growth was 24.7%. If this is the final number, it will be the second consecutive of earnings growth being above 20%. 

American banks had one of the best quarterly earnings, helped by their investment banking divisions. Data shows that the five biggest banks made over $114 billion in capital markets revenue, up by 31% YoY.

Estimates are that the real earnings growth will be substantially strong, helped by the technology sector. Magnificent 7’s earnings growth is expected to be 31.1%.

Odds of Fed Rate Hikes Fall

In addition to the earnings growth, odds of the Federal Reserve hiking interest rates this year dropped to 53% from this week’s high of over 70%. These odds fell after the US published encouraging consumer and producer inflation report.

The report revealed that the headline Consumer Price Index dropped from 4.2% in May to 3.5% in June. Similarly, the Producer Price Index fell from 6.0% to 5.5%. Historically, the stock market does well when odds of a Fed hike are falling.

AI Jitters and Key Earnings Contributed to Stocks Retreat

The S&P 500, Dow Jones, and Nasdaq 100 indices have retreated by over 5% from their highest levels this year. This retreat happened as some big names released weak earnings report. 

Netflix stock also continued falling after reporting weak numbers and withholding some of its key user metrics.

At the same time, there are signs that investors are getting concerned about the AI industry, with top gainers like Micron, SanDisk, Western Digital, and Nvidia being in the red. Most of these firms have fallen by over 20% from their year-to-date highs.

Stocks also dropped on Friday after Moonshot, a Chinese company, released Kimi K3, the most powerful AI model. This release raises concerns on the lead of companies like Anthropic and OpenAI.

Still, on the positive side, the S&P 500 Index is still cheap, with the forward price-to-earnings ratio being 20. Also, most analysts have a favorable view of the index.

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