Weekly Market Update: Spring Rally Spring-Up

Stock Market and Economy Roundup

This past week was another wild ride, with earnings providing somewhat of a bright spot compared to the other major issues du jour. While strong earnings from major technology companies lifted investor sentiment, gains were capped by jitters surrounding the regional banking space and economic data that stoked recession worries.

The ongoing debt ceiling saga, along with the banking worries and the data during the week that continued to show major signs of cooling in the U.S. economy, has led investors to bolster their expectations of a rate-hike pause after the coming meeting. The initial estimate for the first quarter U.S. GDP came in much weaker than expected, underpinning these expectations. However, the core personal consumption expenditure index, the Fed’s favorite inflation gauge, hasn’t eased as much as was expected year-on-year, in another sign that the inflation is moderating slower than the policy makers would like it to, and countering the rationale for a pause in June.

Markets have long ago priced in the Fed’s 0.25% hike this coming Wednesday. Now, all eyes will be on this meeting’s minutes in search of clues regarding the central bank’s next moves, although the Fed, at this point, cannot have any certitude as to what they will be. 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.

Another Bank, Another Takeover

Markets were hit with another round of banking sector worries this past week, as a worsening situation at First Republic Bank reignited concerns over the stability of the financial system. On Monday, the embattled lender disclosed $72B of net deposit outflows in its first quarter, sending its stock plummeting through the rest of the week. During the week, the regulators were searching for ways to save the bank; by Friday it was quite clear that the regulatory takeover is imminent.

FRC was hit with large withdrawals in March, after Silicon Valley Bank, Silvergate Bank, and Signature Bank failed; the lender was then rescued by JP Morgan (JPM) and other largest U.S. banks.

FRC shares lost 75% of their value – or of what was left of their value after March’s drama – last week alone; year-to-date, the stock is down over 97%.

Now it looks like there is no other way for the regulators to avoid another round of turmoil in regional banks but to place it under Federal Deposit Insurance Corporation’s (FDIC) receivership, following which the failing lender’s assets will be bid upon by other banks. According to a Wall Street Journal report, JP Morgan and PNC Financial Services Group (PNC) could be bidding for the First Republic following the government seizure.

A swift resolution of the FRC trouble could, to some extent, restore confidence in the regional and smaller banks, provided there is no more banking mess to be uncovered.

A Handful of Resilience, a Pinch of a Rally

The third-most-talked-about theme on Wall Street now – after earnings and next week’s Fed meeting – is the breadth, or the lack of it, of the current stock rally.

The 7 biggest stocks in the S&P 500 (SPX) – Alphabet (GOOGL), Apple (AAPL), Meta (META), Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA), which account for 25% of the index by weight – have collectively driven almost 90% of its overall return year-to-date. These behemoths also account for 50% of the value of the Nasdaq 100 (NDX), which explains the stark difference in the indexes’ performance this year.

While the S&P 500 has risen 9% year-to-date, the Nasdaq Composite (NDAQ) is up almost 18%, and the Nasdaq 100 is in a bull market with a 22% gain. At the same time, the Dow Jones index (DJIA) has logged a meager 3% gain this year. The blue-chip index holds only Microsoft and Apple out of the technology giants list; with 5.7% and 3.3% weight of the index, accordingly.

For the S&P 500, this year’s rally has been one of the most concentrated on record. The tech giants’ leadership should not be dismissed, as they matter a lot not only for the stock markets but also for the U.S. as well as for the global economy. But the concentration of strength in a handful of companies while the rest of the index treads water, at best, negates the perception that the S&P 500 represents the U.S. economy. If it does, the economy is not as resilient as the top line suggests.  

A lack of market breadth is the hallmark of an unhealthy market; it is also a typical sign of a bear-market rally. At the end of April, the large-cap index has been in the grip of a bear since October 2022, but its valuation is still above a long-term average, leaving it on a path for further downside. Needless to say, most of the premium is found in the prices of the same 6 largest stocks that have surged back after last winter’s demise.

S&P 500 is pricey considering the weakening economy, but the tech is very, very expensive: while the large-cap stock index trades at a P/E of 19.9, the tech surge sent the Nasdaq 100’s multiple to 29.5. The rally in tech stocks certainly looks way overblown; ignoring the surging multiples poses risks for returns down the road. The technology sector’s growth prospects are attractive in the longer term, but in the short term, the current valuations make the mega-tech dangerous.

Equities – Weekly Performance

The stock market had a wild week, with the major indexes testing support but ultimately closing with solid gains. Tuesday was especially rough as First Republic Bank (FRC) spooked investors once again. Stocks kept falling on Wednesday, even as Microsoft (MSFT) boosted the indexes’ performance. Meta (META) stock and other tech titans fueled a strong gain on Thursday. On Friday, the indexes rose modestly, finishing the week – and the month – on an upward swing.

Interestingly, while everyone’s attention was glued to the Technology stocks, the best performer in April was Dow Jones (DJIA), with a monthly gain of +2.5% – compared to S&P 500 (SPX) index’s +1.5%, Nasdaq Composite’s (NDAQ) +0.04%, and Nasdaq 100 (NDX) +0.5%.

However, parts of the market that are more immediately impacted by the economic conditions, such as transportation stocks and small caps, weren’t a part of the rally, as investors repositioned into technology and defensive stocks, such as consumer staples and healthcare names.

Major Economic Events of the Past Week

The U.S.

March’s Chicago Fed National Activity Index (CFNAI) remained unchanged from February’s level of -0.19, versus the expected increase to -0.02.

February’s S&P/Case-Shiller Home Price Indices rose 0.4% year-on-year, versus the expected +0.1% and compared to January’s 2.5% increase.

April’s CB Consumer Confidence Index fell to 101.3, its lowest since July 2022, from March’s level of 104.2; it was expected to decline to 104.

March’s Durable Goods Orders surged 3.2% from February’s -1.2%, way above the expectations of a 0.8% increase.

Q1 2023 GDP Growth Annualized (1^st reading) came in at 1.1%, much lower than the expected 2%, after Q4 2022’s growth of 2.6%.

Initial Jobless Claims for the week ending April 22^nd came in at 230K versus the expected 248K. Continuing Jobless Claims for the week ending April 15^th were at 1.858M, lower than the expected 1.878M.

March’s Pending Home Sales, a leading indicator of trends in the housing market, tumbled 5.2% from February’s zero change; the expectations were for a 0.5% increase.

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.

Eurozone

April’s Consumer Confidence Index rose to -17.5 from March’s -19.1’ in line with expectations.

Q1 2023 GDP Growth (preliminary) was +1.3% year-on-year, versus Q4 2002’s +1.8% and the expectations of +1.4%. The monetary bloc’s economy expanded 0.1% quarter-on-quarter, compared to the expected +0.2%.

Japan

March’s Industrial Production (preliminary) dropped 0.7% year-on-year, compared to February’s -0.5%; it was expected to increase by 0.5%.

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 big tech names. Below are the most noteworthy reports of the past week:

» Coca-Cola (KO) reported earnings and revenues that were ahead of consensus estimates; the shares fell on the week as the report mentioned several headwinds to earnings growth in the current quarter.

» Alphabet (GOOGL) beat on both top and bottom line and boosted its stock buybacks; the company’s shares popped up on the week.  

» PepsiCo (PEP) shares jumped after the beverage giant reported estimate-beating earnings and sales.  

» Microsoft (MSFT) saw its stock jump more than 7% after revenue and earnings exceeded estimates; Azure and other cloud services revenue growth was the star performer of the report.

» Visa (V) delivered impressive quarterly results reflecting rising card usage globally and a rebound in cross-border travel; both revenue and EPS beat estimates.

» General Electric (GE) reported better than expected EPS and revenues, with the former more than twice the expectations.  

» Meta (META) saw its stock pop nearly 14% as it blew past revenue and earnings expectations and touted its work on artificial intelligence.

» Activision Blizzard (ATVI) reported a third consecutive earnings beat; however, the stock dropped 9% on the week. The company’s share performance was strongly impacted by the decision of the U.K. regulators to block Microsoft’s acquisition of ATVI.

» Caterpillar (CAT) beat earnings and revenues estimates by a wide margin; the stock declined on the week on analysts’ concern that the company will not be able to replicate the magnitude of the beat in the next quarters.

» Eli Lilly (LLY) missed earnings estimates but beat on revenues; the shares rose strongly on the week as the company’s positive update about its new and promising obesity drug, as well as an improved 2023 revenue guidance, overshadowed the EPS miss.  

» Intel (INTC) shares rose after the company delivered better-than-expected Q1 financials and provided an upbeat outlook, saying that gross margins will improve in the second half.

» Amazon (AMZN) saw its shares erase a post-earnings gain despite better-than-expected quarterly results, as it signaled its cloud computing, the company’s most profitable division, would slow further on the unfavorable environment for technology spending.

» Mastercard (MA) stock rose after both earnings and revenues beat consensus estimates.

» Chevron (CVX) reported an earnings beat for its first quarter, but the 10% quarter-on-quarter revenue decline sent the stock lower for the week.

» Exxon Mobil (XOM) hit its all-time high as the company reported a record first-quarter profit on rising oil and gas output.

» » Our Star of the Week is Mondelez International (MDLZ). The snack giant’s stock surged 7.6% on the week as the company logged in a fifth straight quarter of earnings outpacing estimates; revenues surged 18% year-on-year, also surpassing estimates by a wide margin. Based on its upbeat Q1 performance, the company raised its full-year 2023 revenue and EPS outlook.

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 Monday, we’ll receive readings on April’s S&P Manufacturing PMI and ISM Manufacturing PMI. April’s S&P Services PMI and ISM Services PMI will be published on Wednesday. On the same day, we’ll see a report on April’s ADP Employment Change, an early indicator for April’s Nonfarm Payrolls and Unemployment Rate, which will be published on Friday.

Elsewhere, this week we’ll get a report on the Eurozone’s Preliminary April Harmonized Index of Consumer Prices (HICP) and the preliminary Core HICP, as well as March’s Unemployment Rate. We also await data on China’s April NBS Manufacturing and Services PMIs and Caixin/Markit Manufacturing and Services PMIs.  

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 Enterprise Products Partners (EPD), ON Semiconductor (ON), SoFi Technologies (SOFI), Stryker (SYK), Advanced Micro Devices (AMD), DuPont (DD), Ford Motor (F), Match Group (MTCH), Under Armour (UAA), Pfizer (PFE), Uber Technologies (UBER), Barrick Gold (GOLD), Equinix (EQIX), Estée Lauder (EL), Qualcomm (QCOM), Kraft Heinz (KHC), Yum! Brands (YUM), Block (SQ), Coinbase Global (COIN), ConocoPhillips (COP), GoDaddy (GDDY), Kellogg (K), Moderna (MRNA), Shell (SHEL), Shopify (SHOP), American International Group (AIG), and Apple (AAPL).   

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 Constellation Brands (STZ), Levi Strauss & Co (LEVI), Carrier Global (CARR), Costco (COST), Intel (INTC), Walmart (WMT), Wells Fargo (WFC), Eaton (ETN), 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.