Stock Market Outlook - Issue 14
Earnings Lead the Market While Economics Are Mixed
Welcome to the fourteenth edition of the 3X Trading Market Recap & Outlook Report. The 3X Trading Team reviews economic data releases, notable earnings, and other remarkable news and uses that information in alignment with technical analysis to establish opinions on the market’s outlook. That information is consolidated and compiled into this report every week for publication on the Dividend Dollars website and 3X Trading. The members of the 3X Trading Team are not traders nor investment analysts by practice or profession. They are learning within this server just like many of our members. Therefore, nothing should be taken as financial advice. Rather, this report is just another resource within our toolbox and should be used to provide additional information and opinions on the market and its happenings. Enjoy reading!
Dividend Dollars’ Stock Market Outlook & Opinion
Last week we were hesitant to make any call aside from volatility on account of earnings being the main item that would control price action this week. Earnings did push the market higher by roughly 1%, with over a 2% swing from the mid-week low to the end-of-week high. I’d say the volatility call and its reasoning was correct.
This week was a volatile fight higher as surprisingly solid earnings and a strong labor market continues to out-bull the bears of declining sentiment and recession fears. We had a decent chunk of economic releases, and most surpassed expectations, helping the grind higher.
The first key to the week was the that Q1 GDP advance estimate came in at +1.1%, compared to +2.6% in 22Q4 and +3.2% 22Q3. Q1 GDP was below the market consensus of near 2% but was on point for the Atlanta Fed GDPNow forecast. Inflation continues to be a weight on non-inflation GDP growth which was +5.1% in Q1. That would be a stellar reading in a normal inflation environment, but with inflation at 4%, we end up with just 1.1% real GDP.
Next was Q1 earnings reports. This earnings season is about half way through, with just over 250 of the S&P 500 companies having completed their reports. So far, 94% of the reporters have beat the EPS estimates, 69% have beat their revenue estimates. From an aggregate basis, the Q1 earnings are down 1.7% year-over-year compared to a -6.6% estimate at the end of Q1. Q1 revenues are up 4% YoY compared to 1.9% expected growth. In comparison to what was expected, this earnings season has been impressive to say the least.
When thinking of the potential headwinds that could slow the market, one could put together a pretty solid list. We have consistent inflation concerns, economists’ warnings of a recession, a debt ceiling debate in Congress, and another potential FOMC rate hike next week. Strong earnings and strong labor markets are enough to keep us bullish, apparently.
This week we saw $SPX briefly dip below the stubborn technical level at 4,100 again, but it has closed comfortable above it this week. Equities in general are doing terrifically compared to what most forecasters expected YTD. The long-term downtrend is far away and $SPX is well above all significant SMAs. At this point, falling back down to bear market lows would require a very scary decline in the market. Yet, on the other hand, a little bit more of a rally would be enough to call a new bull market at just 2.8% higher than current levels.
Going into next week, it is highly likely that we see another 25-basis point rate increase. Then, the second half of the week will be filled with employment data. As earnings continue, there’s no doubt in my mind we will continue to see some strong price action. With that said, the job market has not deteriorated much yet combined with the fact that the second half of earnings could easily be as strong as the first half, next week looks poised for gains and volatility. However, overall performance for next week will ultimately be determined by the reaction to the FOMC decision and if continued earnings surprises can negate a downward move or enhance an upward one.
Weekly Market Review
All major indices closed the last week of April with gains except for the Russell 2000. Investors received tons of earnings news and economic data this week, which all reflected mixed activity. Those mixed results fueled a midweek sell-off before a strong rally effort during the last 2 days.
Earnings results from many mega cap stocks like $MSFT, $GOOG, $AMZN, and $META pulled a lot of focus this week. Unsurprisingly, their reports received mixed reactions from investors.
$GOOG and $AMZN declined on their earnings reports, with the latter warning about slowing cloud services growth, while $MSFT and $META made gains. Nonetheless, mega cap stocks moved the indices higher. The Vanguard Mega Cap Growth ETF ($MGK) rose 1.9% on the week.
On the flip side, some earnings reports contributed to economic growth concerns. Most notably, $UPS, $DOW, $TXN, and $NSC all disappointed with their earnings/guidance.
$FRC fallout continued after its disappointing earnings, which featured a 40% decline in deposits and renewed lingering worries about tighter lending standards and deposit costs.
Economic data this week showed mild weakness, yet there was no clear signal that the economy is deteriorating rapidly. The advance Q1 GDP report didn't look great on the surface with real GDP increasing at an annualized rate of 1.1% after increasing 2.6% in Q4. However, personal consumption expenditure growth rose 3.7% from 1.0% in the Q4.
The March Durable Orders report enhanced slowdown concerns due to a 0.4% drop in nondefense capital goods orders in March, a gauge for business spending. Separately, the labor market remains strong as seen in the initial jobless claims staying far away from levels that have been seen in past recession.
The S&P 500 communication services sector (+3.8%) was the top gainer this week, followed distantly by information technology (+2.1%) and real estate (+1.5%). The utilities (-0.9%) and industrials (-0.6%) had the largest losses.
Stocks had a lackluster showing on Monday. We were in wait-and-see mode ahead of big earnings news and economic dat. The main indices logged only modest gains or losses, ultimately settling the session in mixed fashion.
The hesitancy on Monday came ahead of a slate of important economic data this week, including the Fed's preferred inflation gauge Core PCE on Friday along with big tech earnings throughout.
Without a lot of market-moving catalysts, mega cap stocks drove a lot of the index moves. The Vanguard Mega Cap Growth ETF ($MGK) was down 0.2% while the Invesco S&P 500 Equal Weight ETF ($RSP) rose 0.2% and the market-cap weighted S&P 500 was up 0.1%.
Dow component Coca-Cola ($KO) initially moved higher as investors digested a better-than-expected Q1 earnings report, but KO gave back those early gains to close with a slim loss.
Stocks were in a solid range before finally giving up on Tuesday. The major indices all registered decent losses despite roughly 75% of companies reporting beating earnings expectations.
Growth concerns drove Tuesday's price action following First Republic Bank's (FRC) disappointing earnings results as previously mentioned. The report renewed lingering worries about banks facing higher deposit costs and tighter standards. Sentiment around FRC deteriorated further following news that a team of wealth advisors managing $13 billion in assets may leave the bank, and other news they are considering an asset sale. The stock was halted and faced ongoing selling pressure after it reopened.
UPS's earnings report contributed to slowdown worries after the company lowered FY23 guidance due to macroeconomic conditions and "changes in consumer behavior."
This all offset any strength from other companies that reported earnings and made gains like $VZ, $PEP, and $KMB.
Economic news for Tuesday included the national home price index, US home sales, and the consumer confidence index report.
The FHFA Housing Price Index rose 0.5% in February compared to a revised 0.1% in January.
The S&P Case-Shiller Home Price Index fell to 0.4% in February versus a flat consensus. Last month’s reading was at 2.6%.
New home sales rose 9.6% MoM in March to a seasonally adjusted annual rate of 683,000 units, well above expectations. On a year-over-year basis, new home sales were down 3.4%. The takeaway from the report is that new home sales activity is being helped by the tight supply of existing homes for sale, although affordability issues with higher prices and higher mortgage rates are still dampening stronger new home sales activity. Homebuilder stocks reacted positively to the news.
The Conference Board's Consumer Confidence Index for April fell to 101.3, well below the expected 104. One year ago, the index was at 108.6. The takeaway from the report is that consumers were more pessimistic about the outlook of business conditions and the labor market, which translated into another sub-80.0 reading for the Expectations Index. This was the 13th sub-80 reading in the last 14 readings. A level below 80.0 is a level associated with a recession within the next year.
The market closed mixed, yet skewed negative under the surface. Price action was especially disappointing when considering the 7.2% gain in $MSFT after earnings. The market moved higher early on thanks in large part to support from the mega cap space, but ultimately closed near their lows of the day.
Even $GOOG, which had been up as much as 2.3% after reporting better than expected/feared quarterly results, closed the session with a slim loss.
The negative bias was stemming from growth concerns on bank fallouts, debt ceiling matters, and the Fed's policy path.
Relatively disappointing guidance from $TXN and $NSC and the 0.4% decline in nondefense capital goods orders in March, a gauge for business spending, piled onto the slowdown concerns.
Separately, the U.K.'s CMA said it will block Microsoft's acquisition of Activision Blizzard ($ATVI), which weighed heavily on the latter stock. I wrote a separate article specifically on that news here.
Economic data for Wednesday included the MBA mortgage application and the durable goods orders report.
Weekly MBA Mortgage Applications Index 3.7% compared to -8.8% last week. March Durable Orders 3.2% well above consensus of 0.7%. The key takeaway from the report, though, is that non-defense capital goods orders excluding aircraft, a gauge for business spending, declined 0.4% in March following a 0.7% decline in February.
The stock market had a decidedly strong showing on Thursday. The major indices regained all of their losses from Wednesday and then some. The broader market was boosted by a huge gain in $META after its earnings report. As a result, other mega cap stocks logged outsized gains, driving a 2.6% gain in the Vanguard Mega Cap Growth ETF ($MGK).
The positive price action was improved by beneficial economic outlooks. Favorable earnings and/or guidance from the industrials sector and other companies, along with the healthy 3.4% increase in real final sales in Q1 and initial jobless claims that continue to run well below recessionary levels, helped to calm concerns about the economy being at imminent risk of a hard landing.
Earnings-driven gains in $META and $CMCSA propelled the communication services sector to first place on the leaderboard by a big margin. The consumer discretionary (+2.8%), real estate (+2.4%), and information technology (+2.2%) sectors were also among the outperformers.
Economic data for Thursday included the advance Q1 GDP report, initial jobless claims, and the pending home sales report.
The Advance Q1 GDP report wasn't as underwhelming as it appeared to be at first read. Real GDP increased at an annualized rate of 1.1% compared to 2% expectations and a 2.6% Q4. The GDP Price Deflator increased to 4%. The key takeaway from the report is that the deceleration in growth wasn't because of weak consumer spending. Actually, personal consumption spend growth picked up in Q1 to 3.7% with spending on goods up 6.5% and spending on services up 2.3%. The hit to growth came from the change in private inventories.
Initial jobless claims for the week fell by 16,000 to 230,000 while continuing jobless claims for the week ending April decreased by 3,000 to 1.858 million. The key takeaway from the report is that initial jobless claims remain a long way from the levels that have been seen in past recessions with an average above 375,000.
Pending home sales dropped 5.2% in March (Briefing.com consensus 1.0%) following a 0.8% increase in February.
The market built on Thursday's gains, closing near their highs of the session, despite a sizable decline in $AMZN after the company warned slowing cloud services growth after its better than expected Q1 report.
Nice gains from some blue chip names like $XOM, $CL, and $MDLZ supported the broader market while sharp earnings-related losses in $PINS and $SNAP kept the Nasdaq trailing its peers.
Economic data for Friday included the Q1 employment cost index, the PCE price index, the personal income and spending report, and the consumer sentiment index.
The Q1 Employment Cost Index increased 1.2% for Q1 2023. Wages and salaries, which account for about 70% of compensation costs, increased 1.2% following a 1.2% increase from last month. The key takeaway from the report is that labor costs didn't show any signs of deceleration. Compensation costs for civilian workers increased 4.8% YoY while benefit costs increased 4.5%.
There weren't a lot of surprises in the March Personal income and Spending Report. Personal income increased 0.3% MoM and personal spending was flat.
The PCE Price Index was up 0.1% and the core PCE Price Index, which excludes food and energy, was up 0.3%. The key takeaway from the report is that the core PCE Price Index, the Fed's preferred inflation gauge, held fairly steady at persistently high levels, checking in at 4.6% YoY. The stickiness of that component should keep the Fed sticking to its rate-hike ways.
The final University of Michigan Consumer Sentiment Index for April read at 63.5, in-line with the preliminary estimate. The final reading for March was 62.0. A year ago, the index stood at 65.2. The key takeaway from the report is that consumer sentiment remains pinned at lower levels, stemming in part from inflation pressures that are dragging on attitudes about personal finances due to higher expenses.