Market To Show Some Life At The Open

Articles From: Briefing.com
Website: Briefing.com

By:

Chief Market Analyst

Thus far, the better-than-expected (but not necessarily “good”) Q1 earnings reporting period has failed to move the stock market in a positive direction. The S&P 500, at 4,146 on April 13, closed yesterday at 4,056.

Things are primed for a positive start today, however, as Meta Platforms (META) is up 14% following its report and outlook, and several industrial companies, including Dow components Caterpillar (CAT) and Honeywell (HON), have helped temper concerns about a hard landing with their results and/or guidance.

Currently, the S&P 500 futures are up 23 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 137 points and are trading 1.1% above fair value, and the Dow Jones Industrial Average futures are up 137 points and are trading 0.4% above fair value.

There has been a lot of earnings news since yesterday’s close and the vast majority of companies reporting exceeded analysts’ consensus earnings estimates. That is good news, but here is the rub on why the Q1 reporting period hasn’t been necessarily “good.” 

With nearly 50% of the S&P 500 having reported March quarter results, and approximately 76% of those companies beating earnings estimates, the blended earnings growth rate for the first quarter is still -4.2%, according to FactSet. That is better than the -6.7% expected on March 31, but it is still negative, as in no growth.

For a market trading at a premium valuation in front of the reporting period, it is tough to justify multiple expansion when there is no earnings growth and when many economic indicators are stacking up to suggest earnings estimates for future quarters are likely to be revised lower while Fed officials are lining up suggesting rates still need to go higher to tame inflation.

So, it makes sense that this better-than-expected Q1 reporting period hasn’t translated into a better-than-expected stock market performance. If anything, the stock market’s underperformance, so to speak, aligns well with earnings that, quite frankly, are underwhelming.

The Advance Q1 GDP report, meanwhile, wasn’t as underwhelming as it appeared to be at first blush. Real GDP increased at an annualized rate of 1.1% (Briefing.com consensus 2.0%) after increasing 2.6% in the fourth quarter. The GDP Price Deflator increased to 4.0% (Briefing.com consensus 3.7%) from 3.9%.

The key takeaway from the report is that the deceleration in growth wasn’t because of weak consumer spending. On the contrary, personal consumption expenditure growth accelerated in the first quarter to 3.7% from 1.0% in the fourth quarter with spending on goods up 6.5% and spending on services up 2.3%. The hit to growth came from the change in private inventories. Real final sales of domestic product, which exclude the change in inventories, increased 3.4% from 1.1% in the fourth quarter.

The recognition that spending growth remained strong and that inflation remained high in the first quarter (the PCE Price Index increased to 4.2% from 3.7% while the core-PCE Price Index rose to 4.9% from 4.4%) sent Treasury yields in a northerly direction after the release of the GDP report.

The 2-yr note yield is up 11 basis points to 4.03% and the 10-yr note yield is up five basis points to 3.48%.

An improvement in weekly initial jobless claims — a leading indicator — likely contributed to the pop in market rates as well. Initial claims for the week ending April 22 declined by 16,000 to 230,000 (Briefing.com consensus 245,000) while continuing jobless claims for the week ending April decreased by 3,000 to 1.858 million.

The key takeaway from the report is that initial jobless claims remain a long way from the levels that have been seen in past recessions since 1980, when they have averaged north of 375,000.

Separately, the House, by a slim 217-215 majority, passed the GOP’s debt ceiling bill, which calls for cuts in spending in exchange for lifting the debt limit by $1.5 trillion or until March 31, 2024, whichever comes first. That bill is reportedly dead on arrival in the Senate; and the president has threatened to veto any legislation on the debt ceiling that has strings attached to it.

The stock market, for now, won’t be dead on the open’s arrival like it has been in past sessions. It will show some life following the latest earnings reports and economic data that suggest the U.S. economy is not dying yet.

Originally Posted April 27, 2023 – Market to show some life at the open

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