By Senad Karaahmetovic
Despite analyst warnings that the earnings estimates remain too optimistic given macro risks, the U.S. indices continue to march higher.
The S&P 500 closed 0.8% higher last week on the back of encouraging inflation data, which pointed toward moderating prices. On the other hand, Friday’s retail sales report signaled that the consumer is weakening.
“We think moderating demand and improvement on supply chain disruptions will foster lower inflation as we progress through the year,” said Edward Jones analysts.
The Dow Jones Industrial Average rallied 1.2% to secure the first weekly close above the 100 moving average since February. Finally, the tech rally stalled a bit with the NASDAQ Composite Index ending the week 0.3% higher as the bulls continue to test the 12,300 resistance.
Looking forward to this week, the key economic data release this week is the Philadelphia Fed manufacturing index on Thursday. Several Fed officials are due to speak this week, including remarks by New York Fed President Williams on Wednesday and by Governor Waller on Thursday.
Q1 earnings season is officially underway
The Q1 earnings season has officially started after several banking titans reported on their Q1 performance on Friday. JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) shares rallied on strong numbers while Wells Fargo (NYSE:WFC) struggled to rally amid a more conservative outlook.
Analysts widely expect Q1 to mark the second consecutive quarter of negative year-over-year (YoY) earnings growth and the third consecutive quarter of negative quarter-over-quarter. The earnings growth is expected to be the lowest YoY growth rate since 2020 Q3.
“The US economy is slowing and a recession is certainly possible (although the downturn probably won’t be as deep as some fear, and regardless, stocks care more about earnings than GDP),” Vital Knowledge analysts said Monday.
The most notable earnings reports for this week include:
Monday: Charles Schwab (NYSE:SCHW), State Street (NYSE:STT);
Tuesday: Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), Johnson & Johnson (NYSE:JNJ), Netflix (NASDAQ:NFLX), United Airlines (NASDAQ:UAL);
Wednesday: Morgan Stanley (NYSE:MS), IBM (NYSE:IBM), Tesla (NASDAQ:TSLA);
Thursday: American Express (NYSE:AXP), AT&T (NYSE:T);
Friday: Procter & Gamble (NYSE:PG), Schlumberger (NYSE:SLB).
What analysts are saying about U.S. stocks:
Vital Knowledge analysts: “Our continued optimism is predicated on three main beliefs: 1) the GDP/economic and EPS cycles have become unusually disjointed, with the latter bolstered by five critical tailwinds (aggressive cost cutting, normalized supply chain conditions, less FX pressure, cleaner inventories, and better China demand) despite incremental weakness in the former (there’s way too much focus on a US recession/hard landing and not nearly enough appreciation of the nuances of this particular earnings cycle); 2) inflation and monetary policy globally are at a dovish inflection point; and 3) favorable technical factors remain in place (extremely negative sentiment + lean long positioning).”
JPMorgan analysts: “After being bullish on Value style last year, this year we believe one should be UW Value style, and we also expect that Q1 will be marking the peak of the beta/Cyclicals rally – we have recently called for a reduction in the portfolio beta. We believe Growth and Defensives will be favored in 2H.”
BTIG analysts: “The weak parts of the market remain weak, while the strong parts now appear vulnerable. This is typical of bear markets, and why things happen ‘slowly, then all at once’. Meanwhile, short-term volatility (VIX9D) hit the lowest level since Jan. ’22. As we wrote last week, unless this is a regime change, this should be a headwind for equities. As we discussed last Wednesday, we think we are currently seeing an ‘inverse October playbook’ where the cooler than expected CPI report essentially marks the high, just as October’s hotter than expected CPI report marked the low.”
Roth MKM analysts: “The S&P 500 is becoming tactically overbought as it approaches 4,200. We are seeing signs of internal breadth divergences starting to develop on the charts. We look to hear from companies reporting earnings to see how business is holding up in front of a widely anticipated recession. A weaker dollar is becoming a catalyst.”
Morgan Stanley analysts: “To those investors cheering the softer-than-expected inflation data last week, we would say be careful what you wish for. Falling inflation last week, especially for goods, is a sign of waning demand, and inflation is the one thing holding up revenue growth for many businesses. The gradually eroding margins to date have been mostly a function of bloated cost structures. If/when revenues begin to disappoint, that margin degradation can be much more sudden, and that’s when the market can suddenly get in front of the earnings decline we are forecasting, too.”