by Bryan Perry
April 11, 2023
Nothing resolves market ills and pains more than rising corporate profits. The old saying of “sales fixes everything” applies to just about every kind of business, but for the stock market, the phrase “earnings fixes everything” seems more fitting, especially after the first-quarter roller coaster ride we’ve been on.
The bulls made several attempts to build a sustainable uptrend, only to be broken by a surprisingly hot inflation reading, a hawkish Fed bumping the Fed Funds rate by 75 basis points so far in 2023, a banking crisis that had the makings of a contagion, and a surprise slashing of crude output by OPEC+. Friday’s robust jobs report was released with markets closed, but it raised the specter of more Fed tightening.
Following Friday’s release of the jobs data, MarketWatch reported that, “traders of Fed funds futures priced in nearly 70% chance of a 25-basis point rate hike by the Federal Reserve when the central bank meets in May. The probability of a hike rose to 67.4% after the data, up from 49.2% a day earlier, according to data from the CME’s FedWatch tool. Analysts said the March jobs report would likely embolden the Fed to hike in May, as the labor market continued to see signs of strength last month. The U.S. economy created 236,000 jobs, just shy of the 238,000 median estimate from economists polled by The Wall Street Journal. Average hourly earnings for private-sector employees also slowed to 4.2% over the prior 12 months. Wage growth is seen by the Fed as an important inflation driver.”
Although the job gains were the lowest since December 2020, that fact is not likely to sway the Fed from increasing rates once more. Another quarter-point hike will be their tenth straight hike, taking Fed Funds up to 5.00%-5.25%. Friday’s jobs report comes after the Labor Department last Thursday revised its latest data on jobless claims, indicating that Americans filed an additional 142,000 first-time unemployment claims over the past three weeks—up 24% from levels previously reported. The revisions fueled recession concerns that intensified during the week, with “every major data point” — including jobless claims, manufacturing activity, and construction spending — signaling an economy slowing down, pushing some experts to worry that it may be slowing down too quickly, says Sevens Report founder Tom Essaye.
“A rising trend in claims has been a key missing part of the labor market story, but it is now clear layoffs are increasing,” said Pantheon Macro chief economist Ian Shepherdson last Thursday. “These data alone won’t stop the Fed from raising rates again in May, but they are a warning sign that should not be ignored.” Adding to the rising level of recession talk is the sudden and disconcerting slide in first-quarter earnings estimates and first-quarter GDP, as published by the Atlanta Fed, showing a forecast of only 1.5% growth in GDP for the first quarter, down from 3.5% in only two weeks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
By the time this column is distributed, the next GDPNow report from the Atlanta Fed will have been released on Monday, April 10, and that estimate may also show further weakness, especially with oil prices spiking on the recently announced production cuts by OPEC+, to take place as of May 1.
Even with all this negativity that is broadly known – where the majority expect another rate hike and slower overall growth – the S&P 500 and the NASDAQ are trading very well, considering the rapid sector rotation that has occurred these past two weeks, even in the face of plunging long-term bond yields that are typically a hard landing caution flag. The yield on the 10-year Treasury is coming down, and it looks like 3.0% is the next stop – essentially daring the Fed to raise rates further. And yet, there isn’t one Fed official that I can find that thinks the Fed should pause until the Fed Funds stand at 5.00%-5.25%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
With that said, the market knows this and, in my view, is holding its ground because the tightening cycle is coming to an end, and the Fed is pumping liquidity into the banking system to backstop deposits. Most data points show inflation is trending lower and the job market is finally softening, aside from a buoyant services sector. What the market doesn’t know is what earnings season will deliver in the way of profits and guidance. As of this week, FactSet is forecasting Q1 earnings to decline by a sobering -6.8%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
FactSet lays out the pre-announcement season, stating that as of March 24, 106 S&P 500 companies have issued EPS guidance for the first quarter. Of these, 78 (74%) have issued negative EPS guidance and 28 (26%) have issued positive EPS guidance. In fact, the first quarter has seen the highest number of S&P 500 companies issuing negative EPS guidance for a quarter since Q3 2019 (81). If 78 is the final number for the quarter, it will mark the fourth-highest number of companies in the S&P 500 issuing negative EPS guidance for a quarter since FactSet began tracking this metric in 2006.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, here we are, in the week of April 9-15, heading into the first full week of earnings season highlighted by the money center banks reporting this Friday, with the highest number of earnings warnings going back 17 years, and both the S&P and the NASDAQ are not caving in, as predicted by some very smart people. Sure, some heavyweight tech stocks are holding their ground, but it stands to reason that the market should be trading lower based on all the recent relatively weak data being released.
If all these bearish indicators noted above can’t break the S&P, then maybe the hard landing campers are wrong. Just maybe, the market is already in an earnings recession that will have run its course by the end of Q2, with a rebound in earnings beginning in Q3 and accelerating in Q4.
Assuming inflation is peaking, and earnings are troughing, it makes for an interesting setup, where the early gains of 7% for the S&P and 11% for the NASDAQ not only hold, but potentially double or more from here. For whatever reason (or reasons) there are to talk the market lower, it sure seems from the price action of the stocks that matter most, the clear path of preference for this market is higher.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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