Weekly Market Update: Earnings, the Banks, and the Economy

Stock Market and Economy Roundup

As we watch the first wave of the reporting tsunami and count the signs of further economic weakening, we can’t help the feeling of utter lack of direction. Has the recession already begun? Will the Fed succeed in bringing down inflation without causing an economic “hard landing”? How much more will the interest rates rise and how long will they stay inflated? How much will earnings contract and how many more outlook cuts will be needed? No one knows for sure, not even Jerome Powell. Don’t we all just wish to wake up in 2019?

While such a level of uncertainty is not for the gentle-hearted, investors would be ill advised to outwait the turbulence outside the market. However, we all know by now that it’s impossible to time the market, while missing the best days in the stock markets – which, for the most part, happen during bear markets – can leave investors with 80% lower cumulative returns in the long term. It’s much safer to stay invested but remain extremely selective towards stock holdings. It’s not an easy task, but it’s possible with TipRanks’ trustworthy data and analysis.

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Time Flies When You Are Having Fun

It was only yesterday, it seems, that we almost had the financial system collapse in front of our eyes, just like in 2008. And now, look at it! Watch the financials fly high with the major banks’ better-than-feared earnings pushing up their wings. No matter that the expectations were so low that they were easy to beat. No matter that it’s the behemoths – that were never in trouble this time around – that project optimism through their proud reports. No matter that the major banks’ revenues surged as a result of the swift rise in interest rates (tough on the economy) and a heightened market volatility (vexing for the investors). No matter that the CEOs of that same forecast-beating institutions tirelessly warn that the economy is headed to a hard patch. Someone is still making good money in this economy, and that is positive news. 

Besides the bigger banks, the regional and smaller lenders are also scheduled to report in the next weeks. For now, it seems that since JPMorgan (JPM) et al. saved the almost-failed First Republic Bank (FRC) and prevented the “domino effect,, the worries about regional banks’ fate are forgotten and replaced by other headlines. While we do have many other things to worry about (economy, earnings, politics, whatnot) – it’s likely that if there’s a as much as a hint of potential insolvency in any of the smaller lenders’ reports, the banking sector turmoil will return with a vengeance. Will JPMorgan save them all?

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Everybody Sings the Unhappy Song

The CEO of JPMorgan Jamie Dimon – the savior of smaller banks, the defeater of crises, and the champion of bank earnings – is not optimistic. He says that the banking crisis is far from over; and even after it is, its repercussions will be felt for years to come. Tightened credit conditions, resulting from the banking turmoil, will continue adding strains on the economy. Dimon added that one of the risks he is watching is potentially higher inflation for longer, which will mean higher interest rates, for a longer period of time. All in all, he paints a highly unstable and uncertain macro picture.

Dimon’s colleagues at Bank of America (BAC) sing the same unhappy tune. The bank expects big cuts in earnings outlooks to continue against a worsening economic backdrop; the BofA’s strategists say that even after consensus EPS estimates for 2023 have plunged, they are still too high given that, according to their forecast, we are about to enter or already in a recession.

Ex-CEO of PIMCO, chief advisor to Allianz (ALV), and one of the most prominent contemporary economists, Dr. Mohamed El-Erian, says outright that the Fed has made policy mistakes with regards to inflation (recognizing it too late, which forced it to act fast and furious); we can read between the lines something in the way of “and now we will all pay for these mistakes.” El-Erian is also worried about the economic contagion from the banking troubles, wherein businesses will have a much harder time trying to access credit, thus slowing the economy even more. He even went as far as to say “stagflation” may be on the horizon, with no growth and high inflation – a nightmare for the economy and policy makers, since there aren’t any tools in the monetary toolbox to deal with that.

Darrell L. Cronk, the CIO of Wells Fargo (WFC), reminds us that in the past 10 tightening cycles by the Federal Reserve, the S&P 500 (SPX) bottomed, on average, 6 months after the first rate cut. As we know, stocks usually start rallying a few months before the recession officially ends; ours haven’t even officially started yet. We must have patience, or else.

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Equities – Weekly Performance

As market participants returned from their long weekend on Monday, the Dow and the S&P 500 managed to close with gains while the Nasdaq logged in a small decline. On Tuesday, tech continued to waver ahead of the inflation report, one of the data points that will shape the Fed’s near-future interest rate decision; stocks closed mixed, with only the DJIA, out of the main indexes, closing the day on an upswing.

On Wednesday, U.S. stocks opened higher after cooling inflation data added to the evidence that the Fed’s interest-rate hikes are having their effect on the economy. However, as investors read into the inflation report’s details, the mood quickly soured, and the indexes turned lower. While the headline number fell to its lowest since May 2021, the high reading on the core CPI, which is not affected by the seasonality of energy and food prices, keeps the Federal Reserve on the path to raising interest rates at least one more time this year.

In addition, the Fed’s March meeting minutes were released on Wednesday. According to the notes, the Fed no longer expects a soft landing, but a mild recession, due to the banking stress. Despite that stress and the apparent weakening of the economy, the policy makers have judged inflation to be too significant an issue to forgo increasing rates. Although the likelihood of a recession is now a consensus, the fact that it has been called so by the Fed, who doesn’t usually use that word without an official declaration from the National Bureau of Economic Research, spooked the markets. All major U.S. indexes closed in the red for the day.

On Thursday, things looked up for the stocks, as fresh data confirmed that the economy continues to cool, fanning renewed hopes that the end of the rate-hike cycle is near. Friday began on a sour note as weak retail sales in March, extending the previous month’s declines, confirmed flagging consumer spending and weighed down stocks. Later in the day, stocks rose from the day’s lows on strong earnings from big U.S. banks, which helped dissipate some fears of further banking stress. All major U.S. indexes rose for the week.

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Major Economic Events of the Past Week

U.S.

March’s CPI rose 0.1% month-on-month compared with February’s 0.4%, much lower than the expected increase of 0.3%. Year-on-year, consumer inflation rose 5% versus last month’s 6%; the expectations were for a 5.2% year-over-year rise.

March’s CPI ex. Food & Energy (Core CPI) rose 0.4% month-on-month, as was expected, from February’s 0.5%. Year-on-year, Core CPI rose 5.6%, also in line with expectations, versus February’s 5.5%.

Initial Jobless Claims for the week ending April 8^th came in at 239K versus the expected 232K. Continuing Jobless Claims for the week ending April 1^st were at 1.810M, slightly lower than the expected 1.814M.

March’s Producer Price Inflation (PPI) fell 0.5% month-on-month from February’s 0% and versus the expectations of zero change. Year-on-year, PPI rose just 2.7% compared to February’s 4.9% and forecasted 3% increase.

April’s Michigan Consumer Sentiment Index (preliminary) unexpectedly rose to 63.5 from March’s 62.

March’s Retail Sales tumbled 1% month-on-month from February’s -0.2%; sales were expected to decline by 0.4%.

March’s Industrial Production unexpectedly rose 0.4% from February’s 0.2%; the forecasts were for the same rate of increase.

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China

March’s CPI declined 0.3% month-on-month from February’s -0.5%. Year-on-year, the CPI rose just 0.7% versus the previous month’s 1% which was also expected for March.

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Stock Highlights of the Past Week

This past week the markets reacted to a number of earnings reports, with the most prominent of them being, of course, the banks. But first, let us mention some non-bank early reporters.

» Delta Air Lines (DAL) gained in pre-market trading on Thursday on optimistic guidance provided in the Q1 2023 earnings report published before open; the company said it expects higher-than-estimated earnings in Q2. However, the stock sputtered later in trading as markets were discouraged by Q1 EPS missing analysts’ estimates.  

» CarMax (KMX) stock jumped on a huge EPS beat despite a miss on revenues, with bottom line more than twice higher than analysts’ consensus. The management confirmed aggressive growth plans as well as financial targets for FY 2023.

» UnitedHealth (UNH) reported Q1 2023 financial results on Friday (pre-market). The company’s EPS and revenues topped expectations; the management raised its FY23 earnings outlook.

Now, let’s dig into the main earnings theme for this past week, the financials.

» Blackrock (BLK) posted better-than-expected earnings and revenue was in line with expectations. In Q1 2023, investors continued to pour money into the world’s largest asset manager’s various funds.

» Citigroup (C), JPMorgan Chase & Co. (JPM), and Wells Fargo (WFC) saw their stocks surge on the week as all three financial giants beat analysts’ consensus on revenues and earnings in Q1 2023.

JPM’s and WFC’s, as well as Citi’s, bottom lines were helped by higher interest rates as they allowed the firms to charge higher rates on loans. Meanwhile, all three banking giants benefited as deposits fled smaller banks into their coffers. As demand for safety at the “too big to fail” banks swelled, it allowed them to pay less in interest on deposits than they charged on loans.

» » Our Star of the Week is Archer Daniels Midland (ADM), which jumped 2.8% on the week while its sector, Consumer Staples/Defensive, barely stayed above zero. The agribusiness giant beat EPS estimates in the last 6 quarters in a row; analysts have been upgrading earnings estimates lately in anticipation of another beat in Q1 2023 (the report is due on April 25).  

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Upcoming Economic Calendar Events

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

March’s Building Permits and Housing Starts, published on Tuesday, will help gain a clearer picture on the near-term outlook for the housing market’s supply side. Thursday will be a busy day, with the weekly Initial and Continuing Jobless Claims, Philadelphia Fed Manufacturing Survey, and Existing Home Sales all coming out that day. Finally, on Friday, we’ll receive preliminary readings on April’s S&P/Markit Manufacturing and Services PMIs.

Elsewhere, this week we’ll get reports on Eurozone’s March’s CPI and Core CPI, and April’s S&P/Markit Manufacturing and Services PMIs. We also await Japan’s March CPI and China’s Q1 2023 GDP Growth reports.

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.

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Upcoming Earnings and Dividend Announcements

The Q1 2023 season has begun in earnest; there are some important reports coming out this week.

The most anticipated releases outside of financials are those of Johnson & Johnson (JNJ), Lockheed Martin (LMT), Netflix (NFLX), United Airlines (UAL), Baker Hughes (BKR), IBM (IBM), Kinder Morgan (KMI), AT&T (T), Taiwan Semiconductor (TSM), and, of course, Tesla (TSLA).

The financial sector reports deluge continues with the reports from State Street (STT), Bank of America (BAC), Bank of New York Mellon (BK), Goldman Sachs (GS), Interactive Brokers (IBKR), Charles Schwab (SCHW), Morgan Stanley (MS), Truist Financial (TFC), and numerous regional and smaller banks, as well as many other financials, holding companies and trusts.

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 PNC Financial (PNC), Colgate-Palmolive (CL), CVS Health (CVS), Procter & Gamble (PG), Caterpillar (CAT), and 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.