Weekly Market Update: End-Week Rebound on Economic Optimism

Stock Market and Economy Roundup

March began on a downward slope as persistent inflation and anticipation of higher rates for a longer period of time pushed 10-year Treasury yields above 4%, for the first time since November, on Wednesday. This acceleration in a bond-market rout comes as new data suggests the U.S. economy is not cooling as fast as the markets expected (and as the Fed had hoped), bolstering the case for further Fed tightening.

The shift in the bond-market mood has forced a reappraisal of the Fed’s terminal interest rate, with swaps markets now pricing a peak Fed policy rate of 5.5% in September, and some even betting on 6%. U.S. 10-year yields are the main reference rate for the global cost of capital, and their steep rise (U.S. 10-year yields surged more than 2% year-over-year) dampens the appetite for risk in markets on both sides of the pond. Rising bond yields further threaten equities, specifically the more speculative growth stocks.

The outlook for higher rates is pushing the USD up against the basket of main global currencies, weighing on exporting companies’ revenues. Despite the souring risk sentiment, investors are flocking to small-cap stocks, hoping that domestic-focused companies are immune to problems related to the USD’s strength and global economic and geopolitical woes. As the U.S. economy appears to do better than previously expected, the small caps, which are sensitive to economic changes, are perceived as a viable option. According to Refinitiv Lipper, small-cap mutual funds and ETFs – such as Vanguard Small-Cap ETF (VB) and iShares Core S&P Small Cap ETF (IJR) – attracted a net $4.2 billion year-to-date, while large caps suffered large net investor outflows.

Furthermore, small cap valuations, as represented by the S&P 600 Index (SML), look attractive versus the S&P 500 Index (SPX), with their forward P/E ratios displaying a 22% discount (the long-term average of the discount is 8%).

U.S. Equities – Weekly Performance

Stocks were on the path downward through Thursday but staged a comeback on Friday. Major U.S. indexes snapped out of a three-week losing streak, with the Dow Jones Industrial Average (DJIA) finally repositioning into positive territory year-to-date and the S&P 500 registering its best week since January.

Equities rallied on Friday after the U.S. services sector showed its strongest activity since the summer, underscoring the resilience of the economy and bolstering investors’ hopes that higher rates won’t lead to a “hard landing.” Markets were further heartened by the Atlanta Fed’s Raphael Bostic saying the Fed might pause its rate hikes sometime this summer. Bond markets cheered the news, pushing 10-year yields back below 4%, which added to stock investors’ optimism, especially in the Technology sector. Although the Fed report on Friday underscored the need for further rate increases, even the most hawkish officials haven’t suggested that rates will need to go beyond levels already priced in (around 5.5%).

Major Economic Events of the Past Week

Economic activity in the services sector expanded in February for the second consecutive month as the ISM Services PMI index decreased minutely, to 55.1 in February from 55.2 in January, but exceeded the consensus forecast of 54.3. The sector has grown in 32 of the last 33 months, with the lone contraction in December. The S&P Global U.S. Services PMI index also came in stronger than expected, rising to its highest point since June, at 50.6.

Services data for the Eurozone and China added to optimism that global services are holding up against the inflation and rates headwinds. The dollar fell and oil climbed on the news.

Meanwhile, other datasets didn’t confirm the optimistic view. In the U.S., Q4 2022 productivity declined, while labor costs surged, underscoring simmering price pressures. February’s ISM Manufacturing PMI and S&P Global Manufacturing PMI were lower than expected, pointing to the continued weakness of industrial production; this weakness was further underscored by a decrease in the Chicago PMI. The U.S. Consumer Confidence Index declined again in February for the second consecutive month as worsening expectations outweighed positive assessments of the current situation.  

In Europe, Consumer Confidence was unchanged from January’s -19; the Unemployment Rate also remained static at 6.7%, contrary to expectations of a decrease. The preliminary Inflation reading was also higher than expected, with prices surging by 8.5% year-over-year. China’s official Manufacturing and Services PMIs came in stronger than expected, pointing to expansion in both sectors following the country’s reopening from Covid-19 restrictions, adding to global economic optimism.

All in all, last week’s data was quite positive, which may be a relief for workers and consumers. However, it could lead global central banks to the conclusion that they may need more time than anticipated to bring inflation under control. All eyes globally will be on the jobs data, which may make or break the nascent stock market’s rebound.

Stock Highlights of the Past Week

Earnings season continues in full blast. Retail stock investors were encouraged by Macy’s (M) report that beat earnings estimates, propelling shares up. Meanwhile, electronics seller Best Buy (BBY) also beat Q4 earnings estimates, but fiscal year earnings and revenue guidance disappointed, sending the stock down. On the positive side of the scale, Meta Platforms (META) staged a positive surprise, reporting revenues well above expectations and committing to a huge $40 billion buyback. Another estimate-smashing report came from NVIDIA (NVDA), which reported strength in AI and gaming and issued positive guidance for the coming quarters.  

Still, this past week’s brightest star was Salesforce (CRM). The software company smashed Wall Street expectations, issued a strong forecast and announced an expansion of its buyback program, causing shares to soar. CRM is up 13% on the week and is now among the most upgraded stocks. The stock currently carries a 9 out of 10 rating from TipRanks’ Smart Score, which is derived from 8 unique data sets.

According to Factset, with most of the S&P 500 companies having reported their financial results for Q4 2022, overall performance was subpar to the long-term average. Only 69% have reported EPS above estimates, which is way below the 5-year average of 77%. The year-on-year S&P 500 earnings decline stands at -4.6%, representing the first year-over-year decline in earnings since Q3 2020.

Moreover, Q1 2023 as well as whole-year EPS estimates suffered larger-than-usual cuts by Wall Street analysts. Markets hope that analysts are too pessimistic, and earnings will hold up better than expected. If this scenario plays out, we could expect a major stock market rally; but if the earnings remain subpar, the bounces will not last. With this level of uncertainty, investors are advised to take precautions and base their decisions on trustworthy data and analysis.

Upcoming Economic Calendar Events

This week we’ll receive some very important economic reports on major markets.

In the U.S., ADP Employment Change for February is expected to show an increase of just 10K, a notable decline from January’s +106K added jobs (which was already low by historical standards). This will be just the beginning of the employment-related data flow. On Friday, the U.S. Bureau of Labor Statistics will report on February’s Nonfarm Payrolls, Average Hourly Earnings, Labor Force Participation Rate, and, finally, Unemployment Rate.

Analysts’ consensus is that unemployment will be unchanged from January’s record-low rate of 3.4%, as payrolls decline by just 35K from January’s outstandingly high 517K, while participation in the labor force declines marginally to 62.3% (still remaining at its highest since May last year); annualized average earnings are expected to increase to 4.5% from January’s 4.4% year-over-year. If all this plays out according to forecasts, the expectations of higher interest rates for longer will be reinforced, pouring cold water on markets’ risk sentiment.  

Besides those reports, on Friday we’ll receive a preliminary reading of the Michigan Consumer Sentiment Index for March. February’s index was revised higher to 67 in February of 2023, the highest since January 2022.

Federal Reserve Chair Jerome Powell will testify before Congress on Tuesday and Wednesday, and all eyes will be on his assessment of the economy and monetary policy. Meanwhile, Fedspeak continues to lean hawkish in response to more positive economic surprises, with the Minneapolis Fed’s Kashkari saying he’s open minded on a 25 vs. 50 bp hike in March, while Atlanta’s Bostic warned of the risk of stopping tightening too soon.

Elsewhere, UK’s January GDP is expected to be flat month-over-month, and Japan is projected to report annualized GDP growth of 0.6% in Q4 2022. Bank of Japan, Bank of Canada and Reserve Bank of Australia will announce interest rate decisions next week.  

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.

Upcoming Earnings and Dividends Announcements

Companies releasing earnings reports this week include Adidas (ADDYY), Campbell Soup (CPB), Bj’s Wholesale Club Holdings (BJ), DocuSign (DOCU), Gap (GPS), Ulta Beauty (ULTA), and many more.

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 Blackrock (BLK), General Electric (GE), Autoliv (ALV), Cigna (CI), Home Depot (HD), BHP Group (BHP), Ebay (EBAY), Kraft Heinz (KHC), Occidental Petroleum (OXY), FedEx (FDX) and many other dividend-paying firms.

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