Markets This Week, May 15-19, 2023: All is Well on Planet Big Tech

Economy and Markets: The Week Ahead

Markets anticipate a pause at the June FOMC meeting as they believe the Federal Reserve has already executed its final rate rise. In fact, market participants see the Fed’s next move as a rate cut somewhere around September; the markets are pricing in rate decreases of 75 bps in total by the end of this year. Several Federal Reserve officials will be giving their opinions on the condition of the economy this week; given that inflation is still high, and the labor market is still tight, they are likely to continue opposing the market pricing.

The economy hasn’t yet shown many symptoms of a recession, although several key indicators have slowed significantly. Nevertheless, some investors think the economy is just now beginning to feel the effects of the Fed’s 500 basis point rate rises over the last year.

The market mood is expected to be dominated (again) next week by the regional banking saga, due to concern that tightened lending standards would have a serious negative impact on the economy and may be the final straw that would tip it into a recession.

The state of the banking sector is particularly detrimental to small and medium-sized businesses. The small-cap performance is a clear sign of the hardship in the SME sector: the small-cap Russell 2000 index is down about 1% this year, compared to a rally that has boosted the S&P 500.

The weakening in shares of smaller companies, which tend to generate income locally and be more susceptible to economic fluctuations than bigger corporations, is one of several indicators that investors are anxious about the near future. Investors have been repositioning according to their view of the economy in the next months, and the credit crunch emanating from the banking troubles is adding to the small caps’ decline on the economic outlook.

Earnings: The Final Inning

With about 90% of the S&P 500’s (SPX) companies having reported their first-quarter results, it can already be established that analysts’ estimates were way too pessimistic. 80% of companies in the index beat EPS estimates by 7% on average. Positive earnings surprises were led by the Health Care, Consumer Discretionary, and Information Technology sectors.

The blended earnings decline (which combines actual results for companies that have reported and estimated results for companies that have yet to report) is 2.2%, versus the 6.7% decline that was expected prior to the beginning of the reporting season. However, even a small decline still signifies an earnings recession, as Q1 2023 was the second straight quarter of earnings decreases.

Additionally, not all companies’ earnings fell in the first quarter. Out of 11 S&P 500 sectors, five sectors have reported a year-over-year earnings growth, led by the Consumer Discretionary and Industrials. On the opposite side of the aisle, notable earnings declines were registered in the Materials and Utilities sectors.

Interestingly, despite the U.S. dollar’s weakening vs. other main global currencies, the biggest losers on the earnings front were the companies with higher international exposure. The blended earnings decline for firms that generate more than 50% of sales outside the U.S. stands at 10.2%. Taking out the results of the biggest contributors to earnings declines – Intel (INTC), Moderna (MRNA), and Pfizer (PFE) – the globally-oriented firms are down 5.6% in earnings from the first quarter of 2022. Their results can be explained by the weakness of the global economy, notably that of the Eurozone and China.  

Meanwhile, companies that derive most of their revenues from the domestic market have actually grown their earnings by 2.7% year-on-year. Although these figures are skewed by Amazon (AMZN), whose U.S. exposure is above 70%, domestic-oriented companies ex. Amazon has still produced earnings growth of 0.2%. As the U.S. economy begins to show notable weakness, comparing the second-quarter results of these two groups of companies will be interesting.

Meanwhile, analysts are projecting an earnings decline of 5.7% in Q2 2023, with an expected rebound to growth in the second half of the year, so that in the whole of calendar 2023 the S&P 500 companies are expected to post an earnings growth of 1.2%. These expectations will be updated many times, of course, and even after the updates, there will be many, many surprises. Stay tuned, as with this level of uncertainty, investors are advised to base their decisions upon trustworthy data and analysis.

Upcoming Earnings and Dividend Announcements

The reporting season is drawing to an end, but some important reports are still coming out this week.

The most anticipated releases this week include Tower Semiconductor (TSEM), Home Depot (HD), Cisco Systems (CSCO), Take-Two Interactive Software (TTWO), Target (TGT), Walmart (WMT), Alibaba (BABA), and Deere (DE).

Companies’ reporting dates, consensus EPS forecasts, and past data, together with their analyst ratings and price targets, can be found on the TipRanks Earnings Calendar.

This week’s Ex-Dividend dates are coming for the payouts of Alcoa (AA), Exxon Mobil (XOM), Microsoft (MSFT), Hershey Co (HSY), and other U.S. and international dividend-paying firms.

Companies’ Ex- and Payment dates, together with their analyst ratings and price targets, can be found on the TipRanks Dividend Calendar.

Upcoming Economic Calendar Events

This week we’ll see published several important reports, in both the U.S. and global markets.

The U.S.: On Monday, we’ll receive a reading on May’s NY Empire State Manufacturing Index, gauging business conditions for New York manufacturers. Tuesday will be busy with reports, including April’s Retail Sales, April’s Industrial Production, and May’s NAHB Housing Market Index, an indicator housing market trend in the U.S. Finally, on Thursday, we’ll see published a report on May’s Philadelphia Fed Manufacturing Survey, serving as an indicator of manufacturing sector trends.

Elsewhere, this week we’ll see several important reports on the state of the Chinese economy, such as April’s Industrial Production and Retail Sales.

We’ll also receive reports on the Eurozone’s April Industrial Production and Harmonized Consumer Price Index (HICP), as well as preliminary data on Q1 Employment Change and Q1 GDP Growth.

Japan will release data on its March Industrial Production, April’s CPI, and a preliminary assessment of Q1 GDP Growth.

Current and scheduled economic reports, Fed statements, and other releases, as well as their level of impact on stock markets, can be found on the TipRanks Economic Calendar.

Equities – Review of Last Week’s Performance

This week began on a quiet note, but continued worries about regional banks, as well as the debt ceiling impasse at Capitol Hill, which is still far from being resolved as the deadline approaches, weighed on stocks. Although incoming macroeconomic data still showed no sign of any current recession while pointing to a welcome cooling of the inflation rate, various reports, including a six-month low reading of a consumer sentiment index, reflected compounding economic weakness.

The S&P 500 (SPX) finished the week with a minute decline, while the Dow Jones Industrial Average (DJIA) was down 1%, depressed by a disappointing earnings report from blue-chip Disney. Meanwhile, planet Big Tech continued to rally, lead up by Alphabet (GOOGL). The tech giant’s stock surged after it unveiled a string of new updates and announced it would incorporate generative AI into its products. The Nasdaq Composite (NDAQ) rose 0.75% on the week, and the Nasdaq 100 (NDX) rallied 1%.

Stock Highlights of the Past Week

This past week the markets reacted to several earnings reports, with the most prominent of them being, of course, those of the blue-chip stock of Walt Disney and the payments giant PayPal. Below are the most noteworthy reports of the past week:

» PayPal Holdings (PYPL) beat analysts’ expectations on revenue and earnings and upped guidance for full-year 2023 EPS. However, PYPL tumbled 18% on the week, as analysts cut ratings siting falling gross profit and Apple’s (AAPL) strategic expansion into the financial services sector, which poses a significant competitive threat to PayPal.

» Airbnb (ABNB) was another stock to crash this past week, as the company’s short-term outlook calling for weaker sales and earnings results in Q2 spooked investors, even though the company beat estimates on revenue and earnings in the past quarter.

» Electronic Arts (EA) reported mixed results, as revenue beat expectations but earnings disappointed.

» Occidental Petroleum (OXY) reported lower-than-expected revenues and earnings due to a decline in energy prices.

» Walt Disney (DIS) saw its stock dive 10% in the week after announcing its Q1 results. Although the media giant missed earnings estimates only marginally, the fall in Disney+ subscribers left investors worried.

» Palantir Technologies (PLTR) surged almost 25% on the week after the company beat estimates on earnings and sales. Although the company offered cautious guidance, it impressed investors with upbeat talk about its new AI platform.

» Roblox (RBLX) stock jumped, despite missing on both revenue and earnings, as several analysts upgraded the video game company, saying they expect a return to growth next year.

» » Our Star of the Week is First Solar (FSLR), whose stock surged over 27% on the week. The solar-panel manufacturer announced an acquisition of Evolar, a Swedish company that leads European thin film production. The acquisition is expected to cement FSLR’s global leadership in the thin film photovoltaics (PV) market.

Major Economic Events of the Past Week

The U.S.

» April’s NFIB Business Optimism Index, which reflects business conditions and outlook for SMEs, fell to 89 from March’s reading of 90.1.

» May’s IBD/TIPP Economic Optimism, which measures consumers’ sentiments related to economic conditions, tumbled to its six-month low of 41.6 from April’s 47.4.

» April’s Consumer Price Index (CPI) rose 4.9% year-on-year, its lowest since May 2021, compared with the expectations of no change from March’s +5%. Month-on-month, consumer prices rose 0.4%, in line with expectations, versus March’s +0.1%. CPI ex. Food and Energy (Core CPI) rose 5.5% year-on-year, in line with expectations, versus March’s 5.6% increase.

» Initial Jobless Claims for the week ending May 5^th came in at 264K, their highest reading since October 2021, versus the expected 245K. Continuing Jobless Claims for the week ending April 28^th were at 1.813M, lower than the expected 1.820M.

» April’s Producer Price Index (PPI) rose 2.3% year-on-year, its lowest since February 2021, versus the expectations of a 2.4% increase and with March’s +2.7%. Month-on-month, producer prices rose 0.2% from March’s -0.4%.

» May’s Michigan Consumer Sentiment Index (preliminary) dropped to 57.7, a six-month low, from April’s 63.5; it was expected to decline to 63.0.

» May’s University of Michigan 5-year Consumer Inflation Expectations (preliminary) rose to 3.2% from April’s 3.0%.

Eurozone

» May’s Sentix Investor Confidence tumbled to -13.1 from April’s -8.7, underscoring worsening market opinion about the current economic situation and lower expectations for the next months. 

China

» April’s Exports rose 8.5% year-on-year, versus March’s +14.8. Imports declined 7.9% year-on-year from March’s -1.4%.

» April’s CPI rose 0.1% year-on-year, versus March’s +0.7%.

The U.K.

» Q1 2023 GDP (preliminary) increased 0.1% quarter-on-quarter, the same rate of growth as was registered in Q4 2022. Year-on-year, GDP rose just 0.2% versus Q4’s +0.6%.

» The Bank of England raised its key interest rates by 25 bps to 4.50%, in line with expectations. This was BoE’s 12^th consecutive increase in its battle to curb rampant inflation after the latest CPI report showed prices rose 10.1% year-on-year.