Market Strategy 5/16/2022
The Good, the Bad and the Ugly
Volatility persists as markets navigate policy change and uncertainties
Key Takeaways
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With 457 or 91% of the firms in the S&P 500 having reported, earnings in Q1 are up 10% from a year ago on revenue growth of 14.2%.
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Key economic data scheduled for release this week includes updates on Manufacturing, Retail Sales, Housing, and Jobs which should provide clues as to how the economy is weathering the Fed’s rate hike cycle.
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Our review of forward P/E ratios shows nine S&P 500 sectors as of last Friday at forward P/E multiples below their five-year averages.
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April inflation readings released last week moved in the right direction but only slightly, disappointing some market participants.
Last week saw stocks swing and sway between gains and losses as nervousness about the direction of interest rates, inflation, supply chain dysfunction, China’s zero tolerance policy to COVID-19 variants and geopolitical tension captured sentiment on Wall Street and markets around the world.
Comments from Fed Chair Jerome Powell toward the end of last week appeared to assuage the beast of dark sentiment and negative projections that held markets hostage to see stocks regain some of what they’d shed earlier in the week.
Last Friday the Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russell 2000 and the NASDAQ Composite all closed up on the day with respective gains of 1.47%, 2.39%, 2.57%, 2.4%, 3.06% and 3.82%.
For the week the aforementioned indices shed: 2.14%, 2.41%, 2.02%, 1.61%, 2.55% and 2.8%.
The week ahead will find traders and investors focused on economic data and the results of the few S&P 500 companies left to report results for Q1.
The Week Ahead
Economic data scheduled for release this week tied to manufacturing, retail sales, the housing market and jobs will be perused and pondered by traders and investors for clues to how the economy is weathering the Federal Reserve’s start to the rate hike cycle currently underway.
As the S&P 500’s Q1 earnings season nears a close the results from a mix of widely followed companies across key sectors including Consumer Discretionary, Consumer Staples, Information Technology and Industrials will be pondered along with any guidance provided by management as to what may lie ahead as the year unfolds.
Thus far with some 457 companies of the benchmark’s 500 companies having reported, earnings are up 10.03% for Q1 on back of 14.24% revenue growth. As of last Friday, nine of the eleven sectors were showing positive earnings growth with all eleven sectors showing positive revenue growth in the period.
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Energy with all 21 companies in the sector having reported has shown the best earnings growth in Q1 with earnings up 275.68% y-o-y on back of 59.01% revenue growth
Five sectors thus far have posted double digit earnings growth including:
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Materials with all 28 companies in the sector having reported showed earnings up 42.59% on back of 24.14% revenue growth y-o-y
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Industrials with 68 of 71 companies in the sector thus far shows earnings up 34.48% on back of 12.16% revenue growth
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The Real Estate sector with 29 of 29 companies having reported posted earnings growth of 30.83% on back of 20.46% revenue growth
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Health care with 62 of 65 companies in the sector reported thus far shows 16.21% earnings growth on back of 14.68% revenue growth
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Information Technology with 62 of 76 companies having reported as of the end of last week showed earnings up 10.65% on back of 12.04% revenue growth.
We Can Work It Out
A multiplicity of factors (including those we listed at the beginning of this week’s piece) over the course of 18 weeks this year has seen US stocks shed some $10 trillion (according to Bloomberg News). For all the significance of that number we’d suggest that considering the levels of uncertainty raised by a much needed Federal Reserve change of monetary policy (from the levels of overly generous accommodation reached during the pandemic); the ramp up of geopolitical tensions caused by Russia’s incursion into Ukraine and the aggravation of an already dysfunctional global supply chain along with further disruption from the shuttering of key manufacturing cities in China due to zero tolerance to COVID outbreaks—what has come to pass should not be all that overwhelming to consider.
What is surprising is the relative resilience of the US economy, segments of the world economy and the relative strength of corporate entities and the consumer through it all. We’ll attribute at least some of that resilience thus far exhibited to experience gathered by business, consumers and policy makers over the course of the past 14 years in the process of working through two major crisis (The Great Financial Crisis and the COVID pandemic).
In our view, key to positive resolution of the current challenges on the US landscape is the level and quality of response that lies ahead. We have found that progress not perfection is what counts in taking action toward “finding the way out of the proverbial woods”.
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