Weekly Market Update: A Sigh of Relief at the End of a Nerve-Wrenching Week

Stock Market and Economy Roundup

Oh, what a week it was! It opened with a regulatory overtake of First Republic Bank (FRC) and the sale of its remains to JP Morgan (JPM). Further in the week, everyone’s eyes were on the Fed’s 0.25% rate hike and the expected pause (but no pivot). At the same time, the KBW Nasdaq Regional Banking Index tumbled after the FOMC’s rate announcement, falling to levels last seen in October 2020. Then Apple (AAPL) pushed the markets higher, and a turnaround in regional bank stocks added fuel to the end-week rally.

Equities – Weekly Performance

The major market indices finished mixed, this turbulent week. After another weekly chapter of the regional banking drama pushed risk sentiment down through Thursday, Friday brought a complete turnaround, with some of the main indexes succeeding in regaining their ground and crossing into the black.  

The S&P 500 (SPX) cut its weekly loss on Friday and closed the week down 0.8%; the Dow Jones Industrial Average (DJIA) has declined 1.4%; the Nasdaq Composite (NDAQ) clawed to a weekly gain of 0.2%, and the Nasdaq 100 (NDX) is up 0.3% for the week.

Regional Banks in the Spotlight, Again

The U.S. regional banking crisis has intensified this past week, as the Fed’s rate hike pulled investors’ attention to risks lurking in smaller banks’ books.

Through the week until Friday’s relief, the biggest casualty of a renewed risk flight was PacWest Bancorp (PACW), whose stock sunk following the news that it was “exploring strategic options” (meaning “looking for a cash injection to survive”), including asset sales. What made investors nervous was, probably, the fact that it has the highest concentrations of commercial real estate loans – deemed as the next chip to fall and dent the banks’ books – among the regional banks. PACW stock has shed about 75% of its value year-to-date, and that’s after the eye-popping surge of about 85% on Friday.

Other regional lenders also suffered big declines throughout the week, through Thursday; notably, Western Alliance (WAL) shed more than 50% before Friday’s rebound. The KBW Nasdaq Regional Banking Index made a comeback on Friday, rising 5%; it is down over 27% year-to-date, versus the S&P 500’s (SPX) 8.4% gain and Nasdaq 100’s (NDX) 22.3% rally.

There was no apparent reason for such a strong banking stock rally on Friday except for the absence of fresh bad news, which led market participants to think that maybe the previous days’ declines went too far.

Regional bank stocks are not out of the woods, of course. Their balance sheets are stuffed with assets that aren’t worth what’s written on the books; the high yields on deposits don’t allow for sustainable profitability. Many of these lenders have business models that are just unfit for times of turmoil and a general lack of confidence. We will probably see jolts of panic around regional lenders’ stocks in the coming months.  

Markets Look for Reasons to Rally

Although the Federal Reserve has now brought its benchmark rate to a range of 5.0%-5.25%, the highest since 2007, its decision was an exact match to market expectations. The fact that the banks crashed after the announcement speaks more about a lack of confidence in regional and smaller lenders than about their capital adequacy or liquidity – although there are considerable worries about those, concerning several banks on the list.

The bright spot for stocks was the news that the Fed has dropped a hawkish language from its policy outlook, which the bulls translated as a readiness to cut rates later in the year. However, the Fed’s statement wasn’t dovish, as Powell tried to convey that the policymakers’ choice for the next meeting would be between a hike and a pause. On Friday, Powell’s words were illustrated by a report of a surge in hiring, underscoring the fact the war he is waging against inflation is far from over.

The strong jobs data might have crushed the stocks, had it been published just a few days earlier. Luckily, it came out after the Fed’s rate decision and couldn’t affect it, so the stock markets rallied. The next FOMC meeting is in June, until then, many more important economic data points will come out. No one, not even the policymakers, can project with any kind of certainty what the data will show, and what other currently unexpected events may appear, pushing the Fed’s hand. 

With this level of uncertainty, investors are advised to base their decisions upon trustworthy data and analysis, which can help neutralize the markets’ “peer pressure” and avoid emotional decisions.

Major Economic Events of the Past Week

The U.S.

March’s Core PCE (preliminary) rose 4.6% year-on-year versus the expected 4.5% increase and the previous quarter’s +4.6%. Month-on-month, the index registered the same rate of increase as in February, +0.3%.

March’s Personal Income rose 0.3%, the same as in February, versus the expected +0.2%. Personal Spending was flat from February’s +0.2%, compared to the expected -0.1% decline.

April’s Chicago PMI surged to 48.6 from March’s 43.8; it was expected to decline to 43.5.

April’s Michigan Consumer Sentiment Index was unchanged from March’s 63.5, in line with expectations.

April’s S&P Manufacturing PMI declined to 50.2 from March’s 50.4; it was forecasted to remain unchanged. S&P Services PMI edged down to 53.6 from March’s 53.7, against expectations of no change.

April’s ISM Manufacturing PMI rose to 47.1, much higher than the expected 46.6, from March’s 46.3. ISM Services PMI jumped to 51.9, more than was expected, from March’s 51.2.

March’s Consumer Credit jumped by $26.5 billion versus February’s increase of $15.3 billion, led by one of the biggest-ever increases in credit-card borrowing. The surge in debt raises fresh worries about the sustainability of consumer finances in a rising-rates environment.

Initial Jobless Claims for the week ending April 29^th came in at 242K versus the expected 240K. Continuing Jobless Claims for the week ending April 22^nd were at 1.805M, lower than the expected 1.863M.

April’s Nonfarm Payrolls unexpectedly surged to 253K from March’s 165K; they were forecasted to rise to 179K. April’s Unemployment Rate fell to 3.4%, near its historic low, from March’s 3.5%. While Average Weekly Hours were unchanged from March’s 34.4, the Average Hourly Earnings showed accelerated wage growth, rising to 4.4% year-on-year from March’s 4.3%.

Eurozone

April’s Harmonized Index of Consumer Prices (HICP) showed a slight acceleration in inflation, unexpectedly rising to 7% year-on-year from March’s 6.9%. Core HICP declined to 5.6% YoY from March’s 5.7%.

The European Central Bank has increased its key interest rate by 0.25% to 3.75%, its highest since October 2008.

China

April NBS Manufacturing PMI tumbled to 49.2 from March’s 51.9, showing an unexpected return to contraction in the sector. NBS Services PMI declined to 56.4 from March’s 58.2, still firmly in the expansion territory.  

Caixin/Markit Manufacturing also showed a decline in activity, falling to 49.5 from March’s 50. Caixin/Markit Services PMI declined to 56.4 from 57.8 in March.  

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 Apple. Below are the most noteworthy reports of the past week:

» ON Semiconductor (ON) reported earnings and revenues that were ahead of consensus estimates and upgraded revenue and EPS guidance for the current quarter.

» SoFi Technologies (SOFI) beat on both top and bottom line and upgraded its 2023 adjusted net revenue outlook; however, the stock fell on analysts’ downgrades and worries about its loan portfolio quality.

» Advanced Micro Devices (AMD) reported estimate-beating earnings and revenues; however, sluggish Q2 guidance prompted downgrades. The stock also tanked as Microsoft (MSFT) denied rumors of a partnership with AMD for AI processors. 

» Pfizer (PFE) beat revenue and EPS estimates and confirmed previous FY 2023 guidance.   

» Uber Technologies (UBER) posted strong growth and improved profitability, with EPS and revenues coming in better than the consensus estimates.

» Qualcomm (QCOM) beat on revenue while EPS was in line with estimates. However, analysts lowered their price targets on the stock after QCOM provided a disappointing outlook for the current quarter, reflecting weaker demand.

» Kraft Heinz (KHC) reported revenues that were in line with estimates while surpassing earnings outlook.

» Block (SQ) beat on revenue and EPS estimates, reporting revenue growth which was driven by strong momentum in different business segments.

» Coinbase Global (COIN) beat earnings outlook, reporting a narrower loss in Q1; however, analysts are wary about next quarters on regulatory uncertainty.

» Kellogg (K) topped revenue and earnings estimates and announced plans to increase the quarterly dividend starting Q3 2023.

» Moderna (MRNA) reported an earnings beat, with EPS coming in positive instead of the expected decline. Revenues strongly declined year-on-year, but less than analysts expected.  

» Shopify (SHOP) reported above-consensus sales growth in Q1; earnings were lower year-on-year, but still beat estimates by a large margin.

» American International Group (AIG) beat on both top and bottom line, as Q1 results were supported by underwriting and investment income.

» Apple (AAPL) posted a second straight quarterly decline in sales, with earnings unchanged year-on-year. However, the quarterly results on earnings and revenues beat analysts’ consensus estimates, thanks to robust iPhone sales and growth in services.   

» » Our Star of the Week is Eli Lilly & Co (LLY), whose stock shot up 7.4% on the week after it announced positive results of a Phase-3 trial of its Donanemab drug for Alzheimer’s disease, saying that the company is planning to file for the FDA approval. Analysts from JP Morgan, BMO Capital, and other prominent firms upgraded the stock outlook, stating that potential approval later this year provides considerable upside for LLY.

Upcoming Economic Calendar Events

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

The U.S.: On Tuesday, we’ll receive a reading on April’s NFIB Business Optimism Index, providing an indication of the health of small businesses in the U.S., which account for roughly 50% of the private workforce and are responsible for about 45% of U.S. economic activity. On Wednesday, the April CPI and Core CPI report will be the focus of everyone’s attention, as the economists will try to gauge whether the stronger-than-expected job market added to the inflation’s stickiness. Finally, on Friday, we’ll see published a preliminary report on May’s Michigan Consumer Sentiment Index. Consumer vigor can result in more spending, leading to an even more robust labor market and a possible increase in inflation, which may influence the Fed to become more hawkish.

Elsewhere, this week we’ll see several important reports on the state of the Chinese economy, such as April’s Exports and Imports, changes in Foreign Direct Investment, April’s Consumer Price Index (CPI), and Producer Price Index (PPI).

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 Dividend Announcements

The reporting season is in full swing; some important reports are coming out this week.

The most anticipated releases this week include Palantir Technologies (PLTR), Paypal Holdings (PYPL), Airbnb (ABNB), Electronic Arts (EA), Occidental Petroleum (OXY), Rivian Automotive (RIVN), Warner Music Group (WMG), Roblox (RBLX), and Walt Disney (DIS).

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 American Electric Power (AEP), IBM (IBM), Charles Schwab (SCHW), Pfizer (PFE), Starbucks (SBUX), Visa (V), United Parcel (UPS), 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.