08/14/2023 Market Strategy
Not Quite a Midsummer Night’s Dream
Markets hiccupped last week on inflation and earnings data—but is it the pause that refreshes?
Key Takeaways
- With 91% (455 of 499) of the companies of the S&P 500 having reported Q2 earnings, results now appear weaker than expected. At this point, aggregate earnings of those companies that have reported are off 8.3% from a year earlier, a bit weaker than the -6.4% contraction expected at the start of earnings season.
- This week a mix of economic data, S&P 500 earnings featuring some of the largest retailers in the US, and the minutes of last month’s FOMC meeting will likely influence market participant sentiment and drive market performance.
- Data out last week on inflation was a mixed bag but consistent with moderating price pressures, in our view.
- Some retracement of the broad market since July 31 suggests to us a pause that refreshes has likely occurred, rather than the end of the bull market.
Last week’s economic data showed that inflation remains close to its lowest levels for this year. That said, the latest inflation data confirmed that “stickiness” remains an issue for the Federal Reserve to deal with in the months ahead as it works toward its 2% inflation target. In our view, the likelihood that another rate hike remains in the Fed’s quiver by year-end should come as no surprise.
Monetary policy doves and hawks were prominent in the media last week pitching their views on economics and investments.
With the S&P 500 off just 2.72% from its July 31st high of this year and the NASDAQ Composite off 4.97% from its July 19 high, these two key indices remain respectively higher by 16.27% and 30.37% from where they started this year through last Friday. This suggests to us that a “trim” and perhaps a “haircut” is what has thus far taken place. Such a retracement we feel is more than likely healthy, rather than marking the beginning of an end to the bull market that emerged from last year’s oversold market conditions.
With September and October standing in the wings and the uncertainty that naturally comes with a process of recovery from crisis, we’d expect some uptick in volatility in the weeks and months ahead.
We remain positive on the US economy and the equity markets. The Fed’s 11 rate hikes and a “skip” (since March of 2022) in its efforts to stem untoward levels of inflation show considerable signs of success, even if still at some distance from its goal of 2% inflation.
Jobs, consumer spending, employment vs. unemployment, GDP (Q1 and Q2) and corporate results in the S&P 500 Q2 earnings season persist in showing resilience that provides support to the case that the central bank this hike cycle may very well not “break something” that would push the US economy into a recession as its detractors posit.
We remain of the view based on improving economic and corporate fundamentals that the US economy could actually skirt a recession this cycle, notwithstanding the bumpiness of the recovery process experienced thus far.
Earnings a Bit Weaker than Expected
The S&P 500 Q2 earnings season is moving into the final stretch, with 455 of 498 companies (over 91%) having reported through the end of last week. Growth is running weaker than the -6.4% contraction expected at the start of the season. As of last Friday, aggregate earnings for the index’s 11 sectors in Q2 showed earnings growth declining 8.25% on back of a 0.38% drop in revenue growth.
That said, of the 11 sectors having reported thus far, seven have posted positive earnings growth. Indeed, two of those sectors have shown double-digit earnings growth in the period reported (consumer discretionary up 53.01% and communications services up 13.21%).
Of the four sectors thus far showing negative earnings growth, three have dragged overall results lower. They have posted double digit declines—energy off 52.04%, materials down 29.37%, and health care down 28.75%.
The Week Ahead
This week a mix of economic data, S&P 500 corporate earnings results featuring some of the largest retailers in the US, along with the minutes of last month’s FOMC will likely influence market participant sentiment and drive market performance.
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