05/30/2023 Market Strategy
Everyday is a Winding Road
The agreement between the Administration and Republican leadership augurs well for markets
Key Takeaways
- With 486 or 97% of the firms in the S&P 500 index having reported first-quarter earnings, those firms have reported profits 2.9% lower than a year ago despite revenue growth of 4.4%. Just ten 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 industrials, consumer discretionary, and energy.
- We continue to expect the Fed to raise its benchmark rate by 25bp at its June 14th meeting, particularly after last week’s PCE deflator showed a slight uptick in inflationary pressures.
- This week has a heavy calendar of stateside economic data including nonfarm payrolls and the ISM survey of manufacturing firms. These will offer our first indication of the economy’s health in May.
Over the long weekend there was good news on an agreement between President Biden and House Majority Leader McCarthy toward a resolution of the debt ceiling. In our view this portends well for the US and the markets even while it doesn’t eliminate the potential for angst near term as the agreement moves toward votes in the House and the Senate.
News reports over the Memorial Day holiday weekend reminded investors and observers that there are constituencies to the left and right of center to challenge confidence that the passage of a bill to avoid default is a done deal.
Bloomberg news noted that President Biden and House Majority Leader McCarthy will “work lawmakers” to pass their deal though not all of their respective party constituencies in the halls of Congress are likely to vote for passage of the bill that outlines the agreement.
The good news is that it appears prominent moderate lawmakers have voiced endorsements of what Biden and McCarthy have agreed on. We expect the bill will get the necessary votes and avoid a US default. It would seem to us career suicide for any politician to attach their name to a vote that would push the US into default and highly disrupt the day to day lives of a broad group of constituencies on both sides of the aisle.
We look for this holiday abridged week to find the markets hyper-focused on any and all news on the potential for resolution on the debt ceiling and as to how it reflects on the health of the economy as well as that of the markets.
Beyond the debt ceiling machinations this week market participants will have focus on a busy calendar of stateside economic data scheduled for release over the course of this week that could provide clues as to the health of the economy particularly as it relates to manufacturing, services, jobs, unemployment and wages as well as how all of that data might shape the outcome of the Federal Reserves’ FOMC meeting that takes place on June 13-14.
As of last week it looked like what had appeared to be a consensus view (reflected in Fed fund futures) that the Fed might pause in June had shifted to consider that the Fed might actually decide to hike rates by another 25 bps after inflation data released last week pointed to inflation remaining stickier than what had been expected earlier.
We remain in the camp that had and continues to expect a 25bps hike when the Fed’s June meeting concludes on June 14. This is based on sticky inflation and a sense that Fed Chair Powell wants to avoid the mistake of pausing or even cutting rates too soon. This could give breath to the inflation’s embers that remain after a period that brought us the highest levels of price increases in 40 years.
Genie in the Bottle
The latest emanations of artificial intelligence have traders, investors and observers “a twitter” these days as the prices of semi-conductor stocks and stocks of other platforms that will build out and host the next chapter of AI get pushed higher.
The chatter and the enthusiasm surrounding AI these days in our view may well be part and parcel of the next wave to take not only tech stocks but the entire equity market broadly higher in a world in which companies in all 11 sectors consider the efficiencies and opportunities that could come from AI to benefit manufacturing and services and more in a time of labor shortages in the US and many other nations.
In our view it is quite natural and not atypical that there will undoubtedly be risks that come with the opportunities created in this latest chapter of technology.
Once again along the timeline of history research, prudence, patience, diversification and right sized expectations will serve as tools that could well benefit investors.
Over the course of four decades in the markets we sense another “genie” has arrived on the scene in a watershed moment and likely won’t go back in the proverbial bottle based on the way the markets have thus far reflected on its arrival.
Over the course of the next few months, quarters, and indeed years the new technologies that will likely unfold could prove disruptive on many levels but ultimately bring great benefits, just as other advances over the timeline of history have for society, business, and the consumer.
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