- The Nasdaq and S&P 500 led gains to the upside with the largest underperformers from 2022 once again seeing the most strength to start 2023.
- Consumer Discretionary, Tech, Communication Services, Real Estate and Financials all outperformed the broader US benchmark.
- The week is expected to be one for the record books, with a range of macro data and reports, including policy decisions by the three major central banks (Fed, BoE, ECB), and key data releases (US ISM, Payrolls, along with Euro area inflation, GDP and confidence data).
- S&P 500 companies with more global exposure have reported lower earnings and revenue numbers than those companies who are more domestically focused.
For the 4Q, 69% of S&P 500 companies have reported a positive EPS beat and 60% of companies have reported a positive revenue surprise.
- For Q1 2023, 17 S&P 500 companies have issued negative EPS guidance, while only 2 have issued positive EPS guidance.
- The European Central Bank (ECB) will give an update on its monetary policy this week with inflation in focus as it remains significantly above the 2% target.
- In Spain, annual inflation rose 5.8% in January, halting five consecutive months of deceleration. Spanish stocks rose 1.59% last week.
Domestic equities finished higher last week in what was considered a broadly positive week for the market. Outside of corporate earnings, the week was void of a major catalyst, with the path of least resistance remaining higher ahead of this week’s Federal Reserve meeting.
The Nasdaq and S&P 500 led gains to the upside with the largest underperformers of 2022 once again seeing the most strength to start 2023. The Nasdaq jumped more than 4% over the 5-days while the S&P gained more than 2.50% and closed above its 200-day moving average for the first time since early December.
In Monday’s session this week US stocks declined, with the Nasdaq 100 registering its worst day since December 2022 as investors turned cautious going into an eventful week. The week is expected to be one for the record books, with a range of macro data and reports, including policy decisions by the three major central banks (Fed, BoE, ECB), and key data releases (US ISM, Payrolls, along with Euro area inflation, GDP and confidence data). And if that wasn’t enough, investors have the busiest week of earnings season and month-end flows to digest.
Consumer Discretionary, Tech, Communication Services, Real Estate and Financials all outperformed the broader US benchmark, the S&P 500 last week. Big Tech was flagged as one of the bright spots this week after MSFT reported earnings and additional layoffs within the tech space were announced.
Auto makers also fared well, led by TSLA which has been the major beneficiary following their order update, while credit-card companies had a good week following the release of AXP and COF 4Q numbers that continued to show strong spending levels amongst their customer base. Semi-conductors (Outside of INTC), large-cap multinational banks, defense names and software were other areas of strength on the week.
Healthcare lagged with weakness in Pharma and Biotech, while airlines were mixed. However, it is worth noting both LUV (Southwest) and JBLU (Jetblue) finished lower following their respective earnings announcements. Despite the reported loss, Southwest posted stronger forward guidance as they saw travel spending/bookings increase.
AXP also flagged stronger travel spending, surpassing $50B in annual revenue for the first time. This was largely driven by Millennial and Gen Z customer acquisition as they look to utilize premium cards with travel benefits since the two groups as a whole have placed a much higher emphasis on travel than previous generations. With 92M millennials in the US, the group as a whole are about seven years behind prior generations in hitting milestones like marriage, parenthood and homeownership.
A few weeks into earnings season and thus far 29% of S&P 500 companies have reported results. So far, what started out with banks easing concerns and being seen as “better than feared”, the consensus has now flipped, and results appear to be a very mixed bag.
Additionally on the earnings front, S&P 500 companies with more global exposure have reported lower earnings and revenue numbers than those companies who are more domestically focused. Companies that derive more than 50% of their sales from outside the US, have fared worse than those who generate more than 50% of their sales within the US. Even with the easing of COVID-19 restrictions in China and a weaker US Dollar (which should help propel sales outside of the US) companies who are more domestically focused have reported a blended revenue growth of 4.5% versus their counterpart of 2.4%. Additionally, the blended earnings decline for more US focused companies currently stands at 3.5%, versus a 7.3% decline for those who generate more than 50% of their sales outside the US.
Other key takeaways so far from this earnings season include:
- For the 4Q, 69% of S&P 500 companies have reported a positive EPS beat and 60% of companies have reported a positive revenue surprise.
- So far, the 4Q blended earnings decline for the S&P 500 is -5.0%. If -5% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decline in earnings since Q3 2020.
- For Q1 2023, 17 S&P 500 companies have issued negative EPS guidance, while only 2 have issued positive EPS guidance.
- In terms of earnings at the sector level, Technology and Communication Services are the top 2 contributors to the earnings decline, but have been 2 of the best performing sectors on the year.
Despite the lower-than-expected start of the earnings season, the market has not been as quick to punish companies who miss expectations. Some companies have even seen modest gains despite losses that exceed historical averages, contributing to the narrative that investors may have gotten too bearish in the past. Overall, market participants appear to be more optimistic about companies’ ability to navigate and be successful in the current economic backdrop.
This week 35% of the S&P 500 is anticipated to report and 12% of the S&P 500 by market cap is expected to release results within a few moments of each other on Thursday night after the bell, including Apple, Alphabet and Amazon (All of which are trading below their 200-D moving average).
Fed- FOMC Meetings
As anticipated, the Fed increased short term rates by 25bps at the February 1 FOMC meeting. Over the coming days, investors will be reviewing the meeting minutes and watching for clues regarding the Fed’s next move at future meetings. Fed chair Jerome Powell has continued to push back against the notion of rate cuts later this year, emphasizing that the committee will not budge until inflation has eased meaningfully. Yet despite this, stocks have rallied in January with investors seemingly brushing off the “higher for longer” narrative.
While a 25bp hike is widely anticipated, investors will be watching for the tone officials will set for future meetings. Fed chair Jerome Powell has continued to push back against the notion of rate cuts later this year, emphasizing that the committee will not budge until inflation has eased meaningfully. Yet despite this, stocks have rallied in January with investors seemingly brushing off the “higher for longer” narrative.
The Bloomberg World index surged 2.04% last week, led by the growth factor, up 3.05%, while value declined 1.43%. Earnings releases were the highlights of the week with updated guidance taking into consideration the macro environment. Brent oil declined 1.11% last week, its first weekly drop in three weeks as PMI releases confirmed weakness in manufacturing and services. The Bloomberg Commodity Index fell 0.46%, with copper down 0.65% and Silver down 1.3%. Emerging markets rallied 1.4%, boosted by the softening of Dollar.
The European Central Bank (ECB) will give an update on its monetary policy this week with inflation in focus as it remains significantly above the 2% target. Markets expect a 50bp rate hike, in line with the latest communications from policy makers at Davos. The main source of uncertainty lies on whether the ECB will maintain this pace of tightening at the next meeting or reduce it to 25bps. Germany and France policy makers said they are in favor of two 50bp hikes, while their Italy and Greece peers are leaning toward a gradual pace. The Euro STOXX Index gained 1.45% last week, led by banks, up 4.14%, and technology, up 3.72%.
In Spain, annual inflation rose 5.8% in January, halting five consecutive months of deceleration. Furthermore, the fourth quarter GDP release shows slowing growth as the economy advanced 0.2%, mainly boosted by government spending. Household spending fell 1.8% during the quarter and the unemployment rate ticked up to 12.8% from 12.6%. Spanish Prime Minister Pedro Sanchez told reporters that Spain should receive €6 billion in recovery funds from the European Union in the coming days. Spain has already received €31 billion from the EU and is the second largest beneficiary of the program after Italy. Spanish stocks rose 1.59% last week.
In China, the real estate property slump and Covid-Zero policy drove the country’s deficit to a record $1.3 trillion last year. In fact, the Chinese economy grew 3% last year, its second-weakest growth rate since the 1970s amid slowing global demand. The government spent over 71 billion Yuan to stimulate the economy, but it did not trickle down fast enough to offset the drop in tax receipts. In the property sector, deed taxes dropped 22% year-over-year in 2022, and land sales revenue fell 19%. The People’s Bank of China (PBOC) eased financial conditions during the same period to stabilize growth, employment, and prices, and ultimately restore consumer confidence. Last week, the PBOC injected additional liquidity in the banking system via its reverse repo facility.
In Japan, the Financial Services Agency (FSA) asked regional banks to prepare for rising rates and potential market swings as part of their vulnerability assessment. The FSA estimates that $1.1 trillion in bonds held by large banks and regional lenders are at risk if BOJ changes its policy. A gauge of Japanese banks has outperformed the broader market in the past three months in anticipation of higher earnings after the BOJ pivot. The 10-year Yen swaps currently stand at 0.6%, well above the BOJ upper range target as traders do not believe the current monetary policy is sustainable.
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