01/30/2023 Market Strategy
- January 30, 2023
Keep on Keepin’ On
Stocks rallied broadly on economic data and a mixed Q4 earnings season as bond yields eased lower
Key Takeaways
- With 143 or 29% of the firms in the S&P 500 index having reported Q4 earnings, profits are off 1.1% from a year earlier on revenue growth of 5.9%. Among the 11 sectors of the S&P 500, six have reported positive earnings growth with four showing double-digit gains.
- Also of key importance on this week’s agenda is the Fed’s FOMC rate decision on Wednesday and the nonfarm payrolls report on Friday.
- The payrolls report should provide some context as to whether recent layoff announcements are a signal of increased recession risk or simply the undoing of panic hiring in 2022 by many businesses in a tight labor market.
- Last week’s economic data showed resilience in GDP even as consumption growth slowed late in the quarter. The Conference Board’s Leading Indicator declined for the tenth straight month.
A Fed rate decision on Wednesday, the jobs number on Friday, along with earnings announcements across key sectors of the S&P 500 including information technology are likely to drive the direction of the markets stateside this week.
Thus far in the first month of the year the major averages have been extending rallies from late last year to take back ground in no small part lost in 2022 to high inflation, geopolitical upheaval and a resurgence of COVID19 variants in China that led to large cities and segments of that country’s economy being shuttered.
Thus far the New Year has ushered in enough positive sentiment to offset uncertainty that remains on the landscape as the Federal Reserve’s efforts to curb inflation appear to be gaining traction and even credibility among enough investors and traders to see stocks worldwide move higher on increased expectations that a hard landing in the US might be avoided. Such a scenario could lead to a recovery in the US and elsewhere around the globe as countries tweak their monetary policies and China pivots from zero-COVID tolerance and reboots its economy.
Time will tell soon enough if the current layoff announcements were more the effect of “panic hiring” or a signal of an imminent recession.
The Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small- caps), the Russell 2000 (small-caps) and the NASDAQ Composite (with some 40% weighted in technology or companies related to technology) closed respectively higher last week: 1.81%, 2.47%, 2.38%, 2.06%, 2.36% and 4.32%.
Five of the six aforementioned major benchmarks have posted positive gains in three out of the four weeks since the start of the year through last Friday. The NASDAQ Composite has posted positive gains for all four weeks in the same period as traders and investors likely sought out “babies that had been thrown out with the bath water” last year.
On a year to date basis the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small- caps), the Russell 2000 (small-caps) and the NASDAQ Composite were up respectively 2.54%, 6.02%, 7.78% 7.87%, 8.53% and 11.04% as of last Friday’s close.
Since the start of the year these major equity benchmarks have moved higher on a number of factors including economic data that while exhibiting some slowing in response to Fed tightening is still showing signs that the US economy remains resilient (though not robust) particularly as it relates to consumer spending, job growth and unemployment.
About Those Layoff Announcements…
Recent announcements of layoffs across a number of sectors including information technology and financials in our view might likely be more the vestige of corporate “panic hiring” when the stateside economy reopened last year amidst shortages of labor that likely lead to overstaffing in some businesses this year as the economy slows.
Thus far the layoff announcements reported (while often in the thousands) have too often appeared to us to be relatively small in number compared to the total number of workers employed by companies making the announcements. As the economy has slowed reflecting Fed tightening the need for fewer staff is likely being felt particularly by businesses that hired aggressively last year. Time will tell soon enough if the current layoff announcements were more the effect of “panic hiring” or a signal of an imminent recession.
Earnings Seasons Rolls on…
S&P 500 Q4 earnings with some 29% of its member companies having thus far reported shows that some 70% have reported upside surprises, which per FactSet data sits below the five-year average of 77% and below the 10-year average of 73% for upside surprises.
Six of the S&P 500’s 11 sectors have reported year-overyear earnings growth as of last week with energy and the industrials sectors leading the other sectors.
Thus far into the earnings season materials, information technology, communication services, and the financials sectors have posted the worst results amongst the seven sectors showing year-over-year earnings declines.
Of the S&P 500 companies that have reported this earnings season 60% have reported revenue growth above estimates—which according to FactSet is below the five-year average of 69% and the ten-year average of 63%.
Eight sectors have thus far reported positive revenue growth with energy and industrials in the lead against the other nine sectors. Three sectors have reported year over year revenue declines led by utilities. (See our earnings score card on page 8 of this report for details and illustrations).
This week some 110 S&P 500 companies are expected to report Q4 results including some of the most widely followed names in information technology, financials, industrials, consumer discretionary, consumer staples, health care, materials and energy. These results will likely provide market participants with further clarity as to the direction the economy and the markets take in the months ahead.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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