Investors are braced for a critical week of earnings with some 180 S&P 500 companies scheduled to report, and some big tech names in the mix. Also, keep in mind, Fed speakers have entered their “blackout period” ahead of its upcoming May 3rd FOMC meeting, meaning, earnings the next two weeks will heavily influence market direction.
Earnings
Alphabet (Google) and Microsoft reporting on Tuesday, Meta on Wednesday, and Amazon on Thursday. These names are all up big and beating the S&P 500 by a wide margin this year, so they need to provide strong numbers and more importantly a good outlook.
Alphabet is up up +19% this year, but has missed earnings expectations every quarter over the past year. Microsoft is up +19% and has beat earnings expectations three out of the last four quarters. META (Facebook) is up +75%, and has missed in the last three consecutive quarters by sizable margins.
The trade is thinking that Facebook has been slashing its spending and should look more profitable in the next couple of quarters. Amazon is up +27%, and has missed in three of the past four quarters.
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So far, just under 20% of the S&P 500 companies have reported, with about 75% beating expectations. Bears continue to point out the low bar that has been set by analysts for Q1 earnings results. In other words, despite all of the companies beating expectations, Q1 earnings for S&P 500 companies are actually on track to decline over -6%. Bears also warn that tech stock valuations in particular have already pushed too high with companies like Apple and Microsoft trading at a forward price-to-earnings ratio of over +25, compared to 18 for the S&P 500 as a whole, which is also arguably a bit rich.
Interest rates
Bears believe this is particularly worrisome in the face of high interest rates that may still climb further and are likely to stay elevated for an extended period of time. Bears also warn that a recession in the second half of 2023, which a majority of Wall Street is bracing for, should mean even lower stock valuations ahead.
Bulls argue that stock markets have already priced in a potential recession, including the tech sector which witnessed double-digit losses last year. And while share prices have risen for many tech companies, most have still failed to recapture their all-time highs. Bulls also believe that cutbacks made by tech companies and others in preparation for a looming recession will help deliver better-than-expected results and help insulate profits in the quarters ahead.
For what it’s worth, communication services companies, including Alphabet and Meta, are expected to post earnings declines of -12%, according to Refinitiv data.
Data to watch
On the economic data front, investors will be closely watching several reports that could impact Wall Street’s expectations for upcoming Federal Reserve moves. April Consumer Confidence on Tuesday is expected to remain flat which would indicate that consumers have not grown more worried about an economic slowdown. The Fed and other economists believe consumer expectations can be a self-fulfilling prophecy so they watch this metric closely. Unfortunately, confidence levels so far in 2023 have remained below 80, a level that often signals a recession within the next 12 months.
Thursday brings the first estimate of Q1 Gross Domestic Product (GDP) with economists expecting it to show the US economy grew at an annualized rate of +2%. If it comes in much above expectations, it could raise worries that the Fed might not feel the need to back off its rate hiking campaign as soon as Wall Street is anticipating. On the other hand, a read much below expectations could ignite more serious concerns about recession.
Probably the most critical data this week is the PCE prices index due out on Friday. The annual rate is expected to slow to +4.2% from +5.0% previously. The “core” rate – which strips out food and energy and is one of the Fed’s preferred inflation gauges – is expected to slow slightly to +4.5% from +4.6% in March.
Today’s data highlight is the Dallas Fed Manufacturing Index. Key earnings today include Canadian National Railway, Coca-Cola, and Whirlpool.
Critical Week For SP500: Earnings, Rates, Economic Report
Wishing you a great week!
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