Stock indexes are coming off their worst week of 2023 so far, although they remain in positive territory for the year.
The Nasdaq leads the pack, up +12%, followed by the S&P 500 up +6.5%, and the Dow up +2.2%. In fact, the S&P 500 is very close to getting back to its midpoint between the 2022 all-time high of 4,797 and the 2022 low of 3,577. The Nasdaq’s rally has been led largely by the tech sector as investors scooped up beaten down shares that got pummeled in last year’s selloff. That’s despite a pretty lackluster Q4 earnings season for tech companies, many of which also offered disappointing guidance.
Earnings
About three-quarters of S&P 500 companies have now reported Q4 results. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the fourth quarter is now -4.9%, versus -3.3% at the end of Q4, according to FactSet.
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Only 4 of the 11 sectors are reporting year-over-year earnings growth – Energy, Industrials, Real Estate, and Utilities. Around 69% of companies have topped analyst estimates. That’s below the average of 76% over the past for quarters, according to Refinitiv, and also against pretty low analyst expectations heading into the reporting season.
Interest rates
Bears warn that profit trends are unlikely to improve, pointing to still-high operating costs, a tight labor market, and consumer budgets strained by inflation. What’s more, bears see the tight labor market forcing the Fed to continue raising rates longer than many – including central bank officials – are currently penciling. And they don’t see rates coming down anytime soon outside a major economic crisis.
Higher interest rates can obviously mean higher borrowing costs for companies. They also make less-risky investments like bonds and money markets look much more attractive, meaning less money flowing into stocks.
Bulls on the other hand still believe inflation is on the way out and the Fed will be cutting interest rates by the end of the year. They also increasingly believe the US economy can withstand the Fed’s higher interest rates, pointing to the labor market that gained half a million jobs in January and a still expanding services sector that had been trailing the recovery in consumer goods. Q4 results from several consumer staple companies this week might provide more clarity into the health of US consumers and changing spending patterns.
Data to watch
Those include Coca-Cola today, as well as Kraft-Heinz on Wednesday, and Hasbro on Thursday. Other highlights today include Airbnb, Marriott International, Suncor, and Zoetis.
There is no economic data today but investors are anxious to see the January Consumer Price Index (CPI) tomorrow. It’s worth noting that this report will reflect changes to how the government weights different goods and services, based on Americans’ recent buying patterns.
These tweaks aren’t expected to affect the actual inflation numbers but economists say it could make forecasts less accurate, at least until analysts adjust for the new weights. In general, the report could cause some confusion as to where price pressures are being felt the strongest.
Top 3 Things to Know to Start Your Week: Earnings, Interest Rates, Data
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