Weekly Market Update: Eventful Week Ends on Uninspiring Note

Stock Market and Economy Roundup

The main theme for the global markets continues to be the economy and inflation, with a current addition of earnings reports supplying even more confusing headlines.

In the U.S., the Federal Reserve’s monthly “Beige Book” survey of economic conditions showed that the economy stalled from the previous update when the Fed was worried the economy remains too resilient for prices to decelerate. This time around, the policy makers note that tighter lending standards at banks are having a cooling effect on business activity. The Beige Book concluded that inflation remains high, but the price increases are moderating following the weakening of consumer spending and the easing of wage pressures.

Generally, the latest Beige Book report brings recession concerns to the fore, as the risks to the economic outlook are on the rise. The data raised bets that the Federal Reserve will pause after hiking by 25 b.p. at its next meeting in May. Meanwhile, policymakers, including Federal Reserve Bank of St. Louis President Bullard and Fed Bank of Atlanta President Raphael Bostic, have said that still-high inflation means more work needs to be done.

On the other side of the pond, the inflation issue looks even worse. European Central Bank Governing Council member Klaas Knot said the ECB may need to follow a widely expected hike next month by raising rates in June and July, as well, as he doesn’t see any convincing reversal in underlying inflation dynamics which could warrant a pause.  

The U.K. is officially in a “cost of living crisis”, as the headline inflation remained in double digits in March; it has been hovering above 10% since July last year, led up by the strongest increase in food prices in more than four decades. Markets now expect the Bank of England to lift its policy rates in May and June, continuing the quickest tightening cycle in 40 years.

Apart from the inflation issue, discordant economic data points as well as conflicting guidance in different companies’ earnings reports don’t help to establish a more or less clear outlook. 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.

The Tech’s Bull vs. Everything Else’s Bear

The earnings season is in full play. Bearish sentiment remains high, but earnings have so far been generally better than expected. The stock market’s fear gauge, the VIX index, is behaving quietly, and stocks remain near the highs for the year.

According to Factset, the S&P 500 is reporting a year-over-year decline in earnings of -6.5% for the first quarter, better than the expected -6.7% but still the largest quarterly decline since the onset of the Covid-19 crisis.

Meanwhile, we continue to witness a two-tiered market. As the S&P 500 (SPX) and the Dow Jones (DJIA) log in small increases year-to-date, largely threading water since the beginning of April, the Nasdaq Composite (NDAQ) is up more than 17% and the Nasdaq 100 (NDX) is in a bull market with a 20.5% gain YTD. Tech, especially the mega-cap technology stocks, has benefited from increased investor flows on the back of the fears associated with the banking crisis.

Will this momentum continue? We shall know soon enough, as the earnings calendar for the next few weeks is packed with the Tech and Communications names. Their results will give a snapshot of the expected growth and the estimated impact of tighter credit conditions on tech firms.

In any case, Tech earnings will shape the future direction of the S&P 500 and the Nasdaq. The market-wide index’s 8.5% gain year-to-date has been almost entirely powered by a handful of tech mega-caps. Alphabet (GOOGL), Apple (AAPL), Meta (META), Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA) are responsible for almost 90% of this year’s increase in the S&P 500. This is one of the narrowest rallies on record; but, on the other hand, who would expect healthy stock market behavior in this environment?

Equities – Weekly Performance

Stocks had a slow start to the week on Monday as investors took in mixed quarterly results from a handful of financial sector names. Tuesday saw more sideways trading as investors had a hard time making up their minds amid a heavy day of earnings reports from big banks and other blue chip stocks. Hawkish commentary from two Fed officials also caused markets to struggle for direction. On Wednesday, stocks spent most of the day in the red as dispiriting inflation data from the U.K. and Netflix’s (NFLX) mixed earnings report projected a risk-off mood. On Thursday, stocks were dragged down by Tesla’s (TSLA) 10% drop on earnings miss; sentiment also soured following reports showing further weakness in manufacturing and an uptick in jobless claims. Friday’s wishy-washy gains couldn’t cover for the week’s wobbly performance; all main U.S. indexes finished the week with small losses.  

Major Economic Events of the Past Week

The U.S.

April’s NY Empire State Manufacturing Index surged to +10.8 from March’s -24.6; it was expected to increase to -18.

March’s Building Permits tumbled 8.8% from February’s +15.8%. Housing Starts unexpectedly fell 0.8% from February’s +7.3%. Both reports point to a substantial weakening in the housing construction industry.

Initial Jobless Claims for the week ending April 15^th came in at 245K versus the expected 240K. Continuing Jobless Claims for the week ending April 8^th were at 1.865M, much higher than the expected 1.820M.

April’s Philadelphia Fed Manufacturing Survey tumbled to -31.3 from March’s -23.2, compared to the expected increase to -19.2.

April’s S&P/Markit Manufacturing PMI (preliminary) unexpectedly surged to 50.4, rising above the threshold signifying expansion, from March’s 49.2; it was forecasted to decline to 49.0. April’s Services PMI (preliminary) jumped to 53.7 from March’s 52.6 versus the expected decrease to 51.5. 

Eurozone

March’s CPI declined to 6.9% year-on-year, a 13-month low, from February’s 8.5%; the drop was led primarily by a rapid fall in energy costs. March was the 6^th consecutive month of declines in the headline CPI. However, Core CPI accelerated to 7.5% from February’s 7.4%, keeping the ECB on alert.

April S&P/HCOB Manufacturing PMI (preliminary) unexpectedly contracted further to 45.5 from March’s 47.3, versus the expected increase to 48. Services PMI (preliminary) surged to 56.6, its highest point in a year, from March’s 55, versus the expected decrease to 54.5.

Japan

March’s National CPI ex. Fresh Food, which serves as the country’s headline inflation indicator, was unchanged from February’s 3.1% year-on-year; in line with the expectations.

China

Q1 2023 GDP Growth came in at 4.5% year-on-year, versus Q4 2022’s 2.9% and much higher than the expected 4%.

The U.K.

March’s CPI jumped 10.1% year-on-year, lower than February’s 10.4% but much higher than the expected 9.8%. U.K.’s food prices rose by 19.2%, a 45-year high.

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, Netflix and Tesla – but the banks also continued to catch their place in the headlines. Below are the most noteworthy reports of the past week:

» Charles Schwab (SCHW) beat the earnings estimates but missed revenues. The company said that although sentiment remained bearish, SCHW took in over 1 million new brokerage accounts during the quarter.

» State Street (STT) missed consensus estimates on both revenue and earnings, due in part to lower fee revenue and a provision tied to a deposit made to First Republic (FRC) as STT helped shore up the embattled regional bank’s liquidity.

» Johnson & Johnson (JNJ) topped Wall Street estimates on both the top and bottom lines, raising its EPS forecast for the remainder of the year. However, JNJ stock sold off on concerns over the company’s litigation risk stemming from allegations that talc used in its baby powder is carcinogenic.

» Goldman Sachs’ (GS) earnings exceeded analysts’ estimates, but revenue fell short on disappointing results from fixed-income trading on the back of the turmoil in the bond market. A slump in mergers and acquisitions and IPOs also weighed on results.

» Morgan Stanley (MS) reported earnings and revenues that beat analysts’ expectations. However, shares fell as the banking giant suffered a decline in its institutional securities business, which comprised almost half of the total revenues in the first quarter. The decline was driven by a sharp fall in investment banking revenues.

» Bank of America (BAC) beat estimates on revenues and earnings. The top and bottom lines were helped by a 25% jump in net interest income. As opposed to GS, BAC’s income is more dependent on traditional banking than on fees from investment banking activities; it also benefited from an influx of deposits from its smaller peers.

» International Business Machines (IBM) missed revenue estimates but beat on earnings. The company announced that it had teamed with Moderna (MRNA) to advance mRNA research.   

» AT&T (T) stock slumped over 10% despite beating analysts’ earnings estimates, as revenues faltered, and free cash flow came in three times lower than expected. AT&T offered up a positive outlook, but the quarterly results raised concerns about the company’s ability to meet its guidance.

» Netflix (NFLX) topped earnings estimates but missed on revenues. NFLX also added 1.75 million subscribers over the quarter. However, the stock fell on the day of the report as the company’s decision to delay its planned crackdown on password sharing disappointed investors.

» Tesla (TSLA) missed Wall Street estimates on earnings and revenues, albeit by a slim margin. The decline in earnings is a result of Elon Musk’s price war, aimed at grabbing a larger market share from TSLA’s competitors. The CEO of the EV maker said that the company prioritizes sales growth ahead of profit in a weak economy.

» » Our Star of the Week is Abbott Labs (ABT), which surged almost 7% on the week after the company delivered estimate-beating results for Q1’s earnings and revenues. The healthcare mega-cap company reported a strong increase in sales in its Medical Devices units worldwide; several recently launched products and new indications contributed to the strong performance. ABT’s management said the firm is off to “a very good start” to the year, and raised the outlook for the underlying base business, which is expected to continue offsetting lower forecasted earnings contribution from COVID-19 testing-related sales.

Upcoming Economic Calendar Events

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

March’s Chicago Fed National Activity Index (CFNAI), a monthly index designed to gauge overall economic activity and related inflationary pressures, will be published on Monday. On Tuesday, we’ll receive readings on February’s S&P/Case-Shiller Home Price Indices and April’s Consumer Confidence Index. On Wednesday, March’s Durable Goods Orders will help assess the state of the U.S. production activity. The crucially important preliminary reading of the Q1 2023 GDP Growth Annualized will be released on Thursday. Finally, on Friday, we’ll receive a preliminary assessment of the Federal Reserve’s preferred inflation gauge, Q1 2023 Core PCE. Also on Friday, we’ll see reports on March’s Personal Income and Personal Spending, April’s Chicago PMI, and April’s Michigan Consumer Sentiment Index.

Elsewhere, this week we’ll get a report on Eurozone’s April Consumer Confidence Index and a preliminary reading on Q1 2023 GDP Growth.We also await data on China’s April NBS Manufacturing and Services PMIs and Japan’s March Preliminary Industrial Production.

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 Q1 2023 season is in full flow; some important reports are coming out this week.

The most anticipated releases this week include Coca-Cola (KO), 3M (MMM), Alphabet (GOOGL), PepsiCo (PEP), Microsoft (MSFT), Visa (V), General Electric (GE), Boeing (BA), Meta (META), Altria (MO), Activision Blizzard (ATVI), Caterpillar (CAT), Eli Lilly (LLY), Intel (INTC), Amazon (AMZN), Mastercard (MA), Chevron (CVX), and Exxon Mobil (XOM).

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 Dell Technologies (DELL), L’Oreal (LRLCY), Stellantis (STLA), Clorox (CLX), Lowe’s (LOW), West Pharmaceutical (WST), Bank of New York Mellon (BK), Conagra Brands (CAG), Citigroup (C), and other U.S. and foreign dividend-paying firms.  

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