Today in the podcast, we reflect on hot topics and some of the most interesting things we saw and heard last week for the early reporters and our high frequency indicators. Three big things you need to know: First, the S&P 500 earnings backdrop has continued to soften, a problem for stocks in the very near term. Second, we review key themes we’ve been seeing and reading in our transcript review – which make the case for some near-term indigestion in the market. Third, we run through key developments in our high frequency indicators – which generally tilt positive and add to our conviction that any near-term indigestion in stocks from earnings will be temporary.
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Takeaway #1: in the stats and performance we continue to see signs that the earnings backdrop for the S&P 500 is softening.
• 69% are beating consensus EPS forecasts so far while 65% are beating consensus revenue forecasts. Both are tracking a little lower than 3Q22 reporting season.
hile, the bottom-up consensus:
o The deterioration in expectations has been broad based by sector ex REITs, Utilities, Staples, and Industrials.
• Interestingly, companies that have missed consensus EPS forecasts have underperformed significantly in terms of immediate stock price reaction so far. The companies that are beating expectations have been holding in nicely versus the broader market but haven’t outperformed as a whole.
• We’re still optimistic that the earnings headwind for stocks could resolve in coming months, as we discussed last week in the podcast. The weakening trends in beat rates and negative stock price reactions simply remind us that there’s some indigestion we need to go through before we get to that point.
Moving on to Takeaway #2: the commentary from the companies that reported last week was pretty mixed in my view, and adds to the case for very near-term indigestion. Four things jump out so far.
• First, some companies outside of Financials have been highlighting recent signs of slowing, which have generally been viewed as explainable and temporary.
• Second, while companies have been striking a confident tone, they’ve also been acknowledging rising uncertainty in the outlook that’s impacting the ability to provide guidance.
• Third, some of the Banks have continued to emphasize the strong starting points/ongoing positions for their own franchises as well as that of their consumer and corporate customers, while at the same time giving a nod to building macro challenges.
• Fourth, the re-openings of China and capital markets deal making activity generally are both being described as complicated affairs. On the latter, the hits to CEO confidence have been emphasized along with the idea that pipelines remain full.
Wrapping up with takeaway #3: the most interesting updates on our high frequency indicators generally tilt positive and add to our conviction that any near-term indigestion in stocks from earnings will be temporary.
• Let’s start with sentiment. Investor sentiment continued to show signs of recovery off extremely low levels in last week’s CFTC update on US equity futures positioning.
o This was true for US and non-US as well as US Small Cap and Growth.
has continued to trade on the:
• And finally, economic surprises have finally shifted into negative territory in the US. We think that will put pressure on the Fed to ease up on its aggressive hiking program. It’s worth noting that Senator Elizabeth Warren tweeted on January 13th “Fed Chair Powell should remember the Fed’s dual mandate: fight inflation and protect jobs. Inflation is slowing, but millions of Americans are at risk of losing their jobs if the Fed keeps up with its extreme interest rate hikes.” We expect to hear more of this kind of pressure from Congress as job losses start to materialize in the economic statistics. Historically, the stock market has often struggled in the one month prior to final hikes, but has posted strong gains following final hikes.
That’s all for now.
Thanks for listening, and please be sure to reach out to your RBC representative with any questions.
