19.04.2023 Earnings and Interest Rates to Move the Market

Investors continue to debate the outlook for Q1 earnings, the Fed’s next policy moves, and the likelihood of the US economy slipping into recession. Bulls are pointing to earnings for S&P 500 companies that are so far topping analysts expectations by around +9%.

Earnings 

Bears however argue that only a small portion of S&P 500 companies have actually reported with most big tech firms not weighing in for another week or two. Keep in mind that tech stocks still dominate the S&P 500, particularly Apple and Microsoft which comprise over +13% of the index by total weight. In fact, the two stocks accounted for about half of the S&P’s March gain of +3.5%.

Year-to-date, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla are responsible for nearly 90% of the S&P 500’s gains. Meaning if earnings for these seven mega caps disappoint and their stocks start to give back those gains, it will likely weigh heavy on wider indexes.

A lot of money has flowed into big tech stalwarts with many investors viewing them as a sort of defensive play against turmoil in the bank sector. Bulls argue that the gains also represent a recovery from overly bearish sentiment that hammered tech stocks in 2022 and saw the tech-heavy Nasdaq lose some -33%.

Currently, the Nasdaq is up over +16% and the S&P 500 is up just over +8% this year. To push higher, bears contend that earnings results need to come in much better than expected. Analysts are still expecting a -5% to -6% decline for S&P 500 companies. More importantly, if companies are offering weak or lower outlooks and full year 2023 expectations start to slide, it may be tough for bulls to justify pushing stocks higher from here. 

For reference, Tesla reports today (4/19), Alphabet and Microsoft report next Tuesday (4/25), Meta reports next Wednesday (4/26), Amazon reports next Thursday (4/27), Apple reports on May 4, and NVIDIA reports on May 24.

Netflix yesterday posted profits and revenue in line with expectations but fell short on new subscribers. It also offered weaker than expected guidance for Q2. Beyond Tesla, today’s highlights include Abbott Labs, Alcoa, Ally Financial, ASML Holdings, Baker Hughes, Citizens Financial, Discover Financial, IBM, Kinder Morgan, Las Vegas Sands, Morgan Stanley, Nasdaq, Synchrony Financial, and The Travelers Companies.

Fed 

Turning to the Fed, there is not really any “new” news but Wall Street is heavily debating whether the Fed will begin cutting rates before the end of 2023. The Fed’s benchmark rate is currently at 4.75%-5.0% and traders give odds of more than 80% that the rate will be lifted another 25 basis-points at the May 2-3 meeting. Consensus mostly expects rates will be at current levels or lower by December. However, Fed officials have continued to warn this week that they believe rates need to stay higher for longer in order to be sure inflation has been fully defeated. 

The Fed’s most recent “dot plot”, which charts where Fed members see interest rates in the future, projects rates will peak at 5.1% in 2023 and end 2024 at a still-elevated 4.3%. 

It’s worth noting that Bank of America yesterday said its customers boosted spending by some +8% in the first quarter, which is not what the Fed is looking for as it seeks to cool the economy. It also doesn’t exactly scream “recession,” another key concern for Wall Street. That of course could change if the job market cracks and consumer budgets continue to be stretched by high prices.

Economic data today is light with the Fed’s Beige Book being the main highlight.

Earnings and Interest Rates to Move the Market

Wishing you a great week!