Stock indexes continue to trade in the fairly narrow range they’ve been stuck in for most of the year. In fact, the S&P 500 has been bouncing around the same 600-point range since last September. While stock indexes overall managed to power through the recent banking turmoil, uncertainty about the Federal Reserve’s next moves and worries about possible recession this year are still keeping a lot of money on the sidelines, making it tough for bulls to really gain any significant ground.

Q1 review

As fresh economic data has rolled in this week, Wall Street’s biggest concern seems to be shifting away from inflation and more toward a potential economic downturn that could result in a drawn out “earnings recession.” Wall Street insiders currently expect an earnings decline of -6.6% for S&P 500 companies in Q1 2023 and a decline of around -4% in Q2.

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Bears however believe those estimates are still too high, especially if the US does flip to recession. For what its worth, S&P 500 earnings decline an average of -16.4% in recessions going back to 1957. Only two of the last 10 recessions saw no decline – the 1973–1975 and 1980 recessions. Notably, both of those periods included climbing levels of inflation.

Q1 earnings season unofficially kicks off with big Wall Street bank results next Friday, including JPMorgan Chase, Citigroup, and Wells Fargo.

Data to watch 

Today, investors are anxious to see private employment data from ADP, which could provide a preview of what to expect from the highly anticipated March Employment Report due this Friday. Insiders expect ADP to report a gain of +200,000 jobs, slightly less than the +240,000 gain anticipated for the official March jobs report.

The other highlight today is the ISM Services Index, a sector singled out repeatedly by the Fed as a driver of inflation. The ISM gauge for March is expected to show expansion for a third month in a row, though at a slightly slower pace than February. The Prices Paid component is seen falling only marginally from 65.6 to 65.2. For most of the past year, investors have treated “bad news” as “good news” when it came to economic data as disappointing results have mostly boosted expectations that the Fed would pause its tightening campaign.

Now, however, with recession worries on the rise, bad news might again just be treated as bad news and result in further stock market weakness. One big question Wall Street is starting to more seriously debate – at what point does the Fed turn its efforts away from fighting inflation and instead start weighing the risks of higher interest rates on a faltering economy? Fed Funds Futures is now give less than 50% odds of a rate hike at t he next Fed meeting May 2-3. There is a lot of data still to come between now and then, including the March CPI report on 4/12 (next Wednesday), March Retail Sales on 4/14 (next Friday), Consumer Confidence on 4/25, and PCE Prices on 4/28.

What Could You Have Missed About Q1

Wishing you a great week!

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