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05/22/2023 Market Strategy

  • John Stoltzfus
  • May 22, 2023

Break on Through to the Other Side

Stocks rallied despite growing concerns about a resolution in the debt ceiling negotiations

Key Takeaways

  • With 471 or 94% of the firms in the S&P 500 index having reported first-quarter earnings, those firms have reported profits 2.8% lower than a year ago despite revenue growth of 4.4%. Just 16 firms are scheduled to report this week as the season winds to a close.
  • Among the 11 sectors of the S&P 500, four are showing earnings growth while seven are seeing declines. Three sectors are showing double-digit earnings growth including consumer discretionary, industrials, and energy.
  • We expect the Fed to raise its benchmark rate by 25bp at its June 14th meeting, with the possibility of another hike in the second half of the year if needed.
  • We see the Fed remaining sensitive to the lags inherent in setting policy and to take into account any economic slowing coming from the crisis of confidence in the regional bank space. 
abstract movement

US stocks moved higher last week as the market focused on what may well be better days ahead should Congress arrive at a positive resolution to adjusting the debt ceiling in time to avoid forcing the United States of America into a near-term default.

Stateside economic data released last week continued to show signs of economic resilience even as the effects of ten interest rate hikes by the Federal Reserve since March 2022 are felt in some slowing across segments of the economy and across revenues and earnings growth for some sectors of the equity market. (See pages 4–6 of this report for details).

Recent inflation data points to the Fed’s having had success in bringing down the pace of headline inflation from over 9% to just under 5%. Though still not near the Fed’s 2% inflation target the improved news on the prices front has some investors thinking that the Fed may pause its rate hike cycle as early as next month and others even thinking that it might begin cutting its benchmark rate before the end of this year.

Quotation from Aenean Pretium

We do not expect a pause by the Fed at its June 14 meeting but rather look for a 25 bps hike.

We do not expect a pause by the Fed at its June 14 meeting but rather look for a 25 bps (or 1/4 of 1%) hike. Inflation in our view remains too high relative to where the Fed wants it to go down to.

However, our expectations are that the Fed is likely to remain highly sensitive to the lagging effects inherent in central bank rate hike cycles. We do believe that the Fed’s sensitivity will take into account and benefit from any economic slowing coming out of the crisis of confidence in the regional bank space.

We also look for the Fed’s ten rate hikes thus far to slow the economy enough so that the Fed will be able to still raise rates further at moderate pace as needed and even possibly skirt a recession. How many more rate hikes do we think are likely this year? Perhaps as many as two more hikes before year end but possibly just one in June followed by a pause. Time will tell soon enough.

The difference in views derived from among stock market and bond market participants in interpreting what Fed officials are saying in their speeches in any given week over the course of the current rate hike cycle suggests to us that investors are likely best to right-size near-term expectations while maintaining a constructive outlook for the US economy and stocks.

Removing monetary policy accommodation has never in our recollection over the past four decades in the markets been easy. In the current cycle ending a period of “free money” (well beyond “easy money” as a result of hyper fiscal policy stimulus piled on top of Federal Reserve levels of easing in response to the uncertainties of the pandemic) has added to the stickiness of inflation and the challenge monetary policy officials have had to deal with

Earning Season is Wrapping Up

With 94% of the S&P 500’s member companies having reported results for Q1 earnings season through last Friday, earnings are off 2.8% on back of 4.4% revenue growth. Given that bottoms-up consensus earnings estimates published by the Wall Street Journal from FactSet data prior to the season’s kick off put earnings off 6.8%, the 2.8% decline is a little better than expected.

Of the 11 sectors in the S&P 500 four have posted positive earnings growth with seven showing negative earnings growth from the same period a year ago. Of the four sectors with positive earnings growth three have delivered double digit earnings growth (consumer discretionary, industrials and energy).

In the week ahead we look for any and all developments on the debt ceiling to carry weight in the day to day performance of stocks, bonds and an assortment of other asset classes. Economic data, earnings results (of those companies yet to report in Q1 earnings season) and the FOMC minutes from the meeting in early May are all likely to carry some weight in the markets’ direction in the week ahead that leads into the Memorial Day Weekend holiday.

Tempus fugit. Carpe diem.

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John Stoltzfus


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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