04/15/2024 Market Strategy
- April 15, 2024
Keep On, Keepin’ On
Earnings season, economic data and a crisis in the Middle East greet investors this week
Key Takeaways
- In our view it’s not about “higher for longer” when it comes to the Fed’s rate regime rather, it’s a continuation of the “pause for now” until inflation gives up its stickiness.
- With only 29 or 6% of the firms in the S&P 500 index having reported it’s too early to say much about results. That said, 86% of firms that have reported so far have beaten expectations and a few cyclical sectors are showing double digit earnings growth for the handful of companies that have reported.
- Last week’s inflation reports showed price pressures remaining sticky as the month-to-month increases surprised to the upside. This pushed out rate cut expectations and led to some selling in both the bond and stock markets.
This week is likely to see the S&P 500 Q1 earnings season take center stage for investors’ focus with some 41 companies scheduled to report results across key sectors including financials, health care, information technology, consumer discretionary, consumer staples and industrials.
The mix of widely followed companies reporting this week includes an array of businesses including: banking, investment banking, insurance, pharmaceuticals, biotechnology, homebuilding, media (streaming), consumer goods purveyors and airlines that should provide a hefty brace of information and some guidance of management expectations of what lies ahead for investors to ponder as to the health of the economy, business and the consumer.
As of last Friday with only 29 or 6% of the firms in the S&P 500 index having reported Q1 results, it’s way too early to say much about what results will look like by the end of earnings season.
Often over the course of history inflation is late to be recognized by monetary officials and then difficult to put in check once it becomes embedded in the economy.
So Far So Good
Although it’s early in the season, still there are some interesting things to note. Four of the five sectors that have had companies report results thus far show double digit earnings growth. Those sectors are information technology, consumer discretionary, industrials and financials. The fifth sector, consumer staples, thus far shows earnings growth at single digits but just under 10%.
Last week’s economic data for March jostled both the bond and stock markets as inflation for a third month proved stickier than many investors and economists had expected dashing hopes for rate cuts sooner than later by the Federal Reserve and causing another round of asset class re-pricing for the near term with rate cut expectations tempered and pushed out further.
We persist with our view looking for the Fed to cut rates in the second half of the year and perhaps not until after the election to avoid the chance that any Fed rate cuts could be considered politicized or politically motivated.
For now, the Fed appears to us to have made remarkable progress in bringing down the rate of inflation that prompted the current rate hike cycle without to date causing a recession. Inflation tends to be sticky. Often over the course of history inflation is late to be recognized by monetary officials and then difficult to put in check once it becomes embedded in the economy.
That said, the actions of the Federal Reserve from the tenure of Paul Volcker through the leadership of Allen Greenspan, Ben Bernanke, Janet Yellen and Jerome Powell at the helm of the Fed reveal respective effectiveness in ultimately bringing inflation to levels that are manageable and to levels that actually have contributed to periods of sustainable economic expansion.
So far with 11 hikes and six skips (pauses) without a recession its progress not perfection with more work to be done.
In our view it’s not about “higher for longer” when it comes to the rate regime prescribed by the Fed this cycle but rather a continuation of the pause as it stands for now until inflation gives up its stickiness.
The current increase in geopolitical risk brought about by hostilities that have increased in the middle east over the weekend are likely to serve as a negative overhang for the market to consider until diplomacy can make progress to avoid further hostilities.
We remain positive on equities and continue to see fixed income securities as complimentary to stocks in providing portfolio diversification.
Some near-term profit-taking in the day-to-day action of the market, particularly in growth segments of the market that have had exceptional run-ups since last year into this year continues to appear to us quite normal. Such activity combined with a process of rebalancing and rotation into other segments of the stock market in our view can be healthy and contribute to the broadening of the markets’ progress from last year through this year.
Near-term volatility could in our view continue to present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market down drafts as the market digests levels of uncertainty that are not uncommon to times of transition like these and in periods of rising geopolitical risk.
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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