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Market Outlook

S&P 500 Q1-2024 Earnings Season Recap: Strong Growth Signals Amidst High Expectations

Earnings Season Recap – Q1-2024, 93% of S&P 500 companies have reported.

Earnings and revenues haven’t disappointed for Q1-2024

On a year-over-year basis, the S&P 500 is reporting its highest earnings growth rate since Q2 2022. This is a welcome return to profit growth after the 4 quarters decline and slowdown. To recall, S&P 500 earnings have stagnated at about $220 per share in 2022 and 2023.

If 5.7% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q2 2022 (5.8%). 

Overall, 93% of the companies in the S&P 500 have reported actual results for Q1 2024 to date. Of these companies, 78% have reported actual EPS above estimates, which is above the 5-year average of 77% and the 10-year average of 74%. However, the magnitude of the beats is not high – 7.5% above estimates, which is below the 5-year average of 8.5% but above the 10-year average of 6.7%.

Revenues:

60% beat estimates – Below the 5-year average of 69%- and the 10-year average of 64%. Remember, this is after an extraordinary bout of inflation in 2022 and 2023. This had to come down because you’re comparing it to a higher base. The magnitude of beats is also low compared to historical averages – only 0.8% above, compared to 2% for 5-year averages and 1.4% for the 10-year. I suspect it will be difficult to raise prices further without reducing demand.

Overall – if 4.2% is the actual revenue growth for the quarter, it will be the 14th consecutive quarter of revenue growth for the index. 

Where will 2024 end up?

Estimates are looking pretty good – 9.2%, 8.2%, and 17.4% for Q2, Q3 and Q4 respectively. Though I’m hard-pressed to see that kind of a jump in Q4. I suspect quarterly growth will be smoother and not the massive spike in Q4.

The overall calendar 2024 growth call is at 11.1% – consistent with earlier calls and my projections of earnings growth from $220 per share in 2023 to $245 per share for 2024. FactSet had an interesting observation – markets have punished negative EPS surprises, – confirming the one trend we’ve been witnessing ourselves, that markets are overbought, and expectations are too high, and unless you beat severely or raise guidance, your stock will get hammered – Facebook (META) was the biggest example.

Q1-24 net profit margins were solid – indicating that price increases and better expense management vaulted NPM to 11.7% – above the previous quarter’s margin of 11.2% and the 5- and 10-year averages of 11.5% and 11.6%.

Overall S&P 500 earnings and revenue increases look good for 2024-2025. Current estimates for calendar 2025 are an even higher earnings growth of 14.1% – this could come down, though – 2024 is not going to be an easy year to beat by 14.1%!

As you know the S&P 500 is a value-weighted index and large caps such as the M-7 tend to skew the numbers higher, even with Apple and Tesla being negative. Also, the “AI” effect has spread, and copper companies and utilities are getting a second look because of power demands, as are smaller players supplying components towards the gold rush among others – thankfully this is moving to other sectors of the economy.

Valuations remain high, of course, the forward P/E is 20.7 – above the 5-year average of 19.2- and the 10-year average of 17.8. Thankfully, at least interest rates are a little lower at 4.45% compared to 4.75% in April. My inclination is that this will trend lower to 4.1% to 4.25% by the end of the year. 

Bottom line – Harder to find bargains. No major surprises, we remain on track for earnings to get to $245 for 2024 and possibly to $270-$275 for 2024, my cash holdings are down to 6-7%. Wall Street is even more aggressive – closer to 4%.

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Market Outlook

Chair Powell’s Remarks: Navigating the Fine Line Between Employment and Inflation Amidst FOMC Decisions

Image Source: Nerd Wallet, Federal Reserve

From Chair Powell “I don’t see the stag nor the flation”

Fed FOMC meeting: Mixed bag, with wild gyrations in the S&P 500, which at one point during J Powell’s Q&A jumped to an intraday high of 5,096 from the low of 5,013.

The tenor though didn’t seem overly hawkish, instead, it seemed more cautious – clearly, they have a lot of work to do ahead and can’t take any chances either – a very fine tightrope to walk, Powell wants to stick to his dual mandate of keeping employment strong and inflation under control. He kept talking about balances – a difficult task, indeed,

The big positive seemed to be the reduction in quantitative tightening to $25Bn from $60Bn. The markets were expecting $30Bn

The Federal Open Market Committee did decide to ease its quantitative tightening by slowing the pace of its balance sheet runoff. The FOMC will reduce the monthly redemption cap on Treasury securities from $60B billion to $25B.

Let’s wait for the Friday payroll report.

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Stocks

April PMI Manufacturing Index Falls Below 50: Signs of Economic Contraction

U.S. PMI Manufacturing unexpectedly slips into negative territory in April

April PMI Manufacturing Index: 49.9 vs. 52.0 consensus and 51.9 in March. The services PMI did, too, slip to 50.9 (vs. 52.0 expected) from 51.7 a month ago, though it remained in positive territory, with the index still above 50.

The composite PMI (flash estimate) came in at 50.9, down from 52.1 in the previous month, signaling business activity in the U.S. expanded at a slower pace during the month, in the wake of signs of weaker demand.

The group’s measure of employment slid 3.2 points to 48, reflecting shrinking services payrolls and slower growth at manufacturers. The composite index of prices received, meanwhile, pulled back from a 10-month high.

“The more challenging business environment prompted companies to cut payroll numbers at a rate not seen since the global financial crisis if the early pandemic lockdown months are excluded,” Williamson said.

The decline in the employment measure suggests companies see current capacity as sufficient to handle demand. Order backlogs remained in contraction territory during the month.

New business at service providers shrank for the first time since October, with some firms indicating higher borrowing costs and still-elevated prices were limiting demand.

The overall index for services activity decreased to the lowest level in five months, while the manufacturing PMI showed a slight contraction.

“Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

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Market Outlook

Market Analysis: S&P 500’s Recent Decline and Interest Rate Implications

S&P 500 5,022 down 243 points, 4.6% from its all-time high of 5,265.

10-Year US Treasury 4.6%, possibly breaching its Oct 2023 high of 4.98%

There has been a lot of consternation regarding the market in the last two weeks, with the index dropping almost 5% and the 10-year jumping from 4.25 to a high of 4.67% because of the fear of higher for longer interest rates due to stubborn inflation and the reluctance of the Fed to cut rates till they put the inflation genie back in the bottle for good.

Let’s look at it chronologically from Oct 2023.

In late October 2023, when the 10-year was close to breaching 5% Janet Yellen signaled lower interest rates by borrowing $76Bn less than anticipated for the last quarter of 2023.  A nod to the nasty run-up in rates, which if unfettered could have been harmful to the economy. The Feds had stopped raising interest rates after the last quarter-point raise in July, and by October, the consensus viewpoint was developing that the markets had done the Fed’s work with the 10-year treasury circling 5%. 

Around the same time, multiple Fed officials had said rising Treasury yields are indicative that financial conditions are tightening, possibly making additional rate hikes unnecessary, when the 10-year Treasury yield topped 4.9% on Wednesday, a first since 2007. During this run-up in interest rates, the S&P 500 had dropped to 4,120 from its July high of 4,560.

Once the 10-year treasury topped out, and Q3 2023 earnings season also exceeded expectations it set up the S&P 500 for a furious run up from the October low of 4,120 to about 4,800 by Dec 2023. A massive gain of almost 700 points or about 17%! helped by the Dec dot plot indicating possibly 3 cuts in 2024

We had another positive run in Q1, to the all-time high of 5,265 – both on AI-related earnings and expectations of the 3 cuts materializing in 2024.

My takeaways

  • A drop of 4.6% compared to the rise from 4,120 in October to 5,265 (28%) is an overdue correction, not a reason to panic.
  • The earnings yield of the S&P 500 = $245/5,022 = 4.9%, which is just above the 10-year treasury yield of 4.6% – we’re getting just 0.3% higher for a riskier investment compared to a risk-free investment of a government security. That’s a very small risk premium, I would think the S&P 500 is likely to fall further to see some semblance of the historic and mean premium of at least 1 to 1.5%.
  • The same argument that the Fed used in October is likely to happen as the treasury inches towards 5% – 
  • a) the market itself has made financial conditions worse, (done the Fed’s work – a 0.6% rise in the treasury is more than 2 quarter-point hikes!) 
  • b) Buying a risk-free (US Government) long-duration bond paying 5% is a damn good yield and when funds start buying bonds, the yields fall. There will be buyers from all over the world for that kind of yield. Especially in the event of further turmoil in the Middle East – that’s the flight to quality and safety. I don’t see yields topping 5% – I would be shocked if it did.
  • The Vix (Volatility Index) or the fear gauge as it is known has shot up to 18-19, after being dormant to steady in the 12 to 14 range through Q1-2024. Computerized trading desks or CTA’s, trade based on volatility which will cause sudden drops and a lot of choppiness, which scares investors. Zero-day options are not helping either. For example, if I see a 1% down day, my first reaction is to lower my buying limits.
  • Earnings season should be good, but misses are likely to be hammered disproportionately given the weakness in the market. Semiconductor monopoly ASML, which missed bookings but assured the same full-year guidance and a great 2025, dropped 8% today.
  • The graph below is a good contrarian indicator and makes me shake my head at supposedly professional investors. Fund managers have record low cash levels – they’re overextended at only 4.2% cash. When they need the money to pick up bargains, they don’t have it! Some professionals! This won’t help the market recover easily.
  • This is another good chart.

If Q1 has risen more than 10%, on every occasion except 1987 (the year of the Black Monday crash) it has closed the year higher. That doesn’t preclude drawdowns and the average pullback in the years was 11%, with a low of 3%.

  • I feel the best way to play this uncertainty is patience and lower limits – the first quarter was exceptional and unlikely to be replicated. 

 THE LONG-TERM STORY FOR QUALITY STOCKS IS VERY MUCH INTACT, but we would be better off getting good prices. The first to recover will be the high-level quality stocks – see how steady Microsoft is compared to the rest. 

  • In the last 15 days, my buy trades and recommendations have been limited as you may have noticed and strictly averaging lower with lower limits. I intend to keep it that way.
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Market Outlook

Fed Rate Cut Unlikely in March: Powell Stresses Patience Amid Inflation Concerns

source

Fed rate cut not likely in March

Inflation has eased from its highs without a significant increase in unemployment— “that is very good news,” Federal Reserve Chair Jerome Powell said Wednesday after the central bank kept its policy rate unchanged for the fourth straight meeting. But he followed that up with inflation still remains above the Fed’s 2% goal. “We need more evidence to confirm what we think we’re seeing,” Powell said.

It will likely be appropriate to dial back the Fed’s policy rate at some point this year, he said.

Powell repeats that the Fed will move “carefully” in considering when to cut rates. He doesn’t think that the FOMC is likely to cut at the March meeting.

While he sees some risk that inflation reaccelerates, “the greater risk is that inflation will stabilize at a rate over 2%.”

He declined to say the economy has achieved a soft landing. “We’re not declaring victory at this point. We have a ways to go.”

“There was no proposal to cut rates,” Powell said. Some members did discuss their rate path. Also, he said there was a broad range of views.

“If we saw an unexpected weakening in the labor market, that would weigh on cutting sooner.”

Powell Gets Good News On Fed’s Favorite Pay Gauge

https://www.nextplatform.com/2024/01/31/how-the-antares-mi300-gpu-ramp-will-save-amds-datacenter-business/?mc_cid=71d0ed9333 HYPERLINK 

https://www.barrons.com/livecoverage/microsoft-alphabet-google-amd-earnings-stock-price-today/card/amd-raises-outlook-for-ai-chips-it-wasn-t-enough–8sSkmy5Es1hNrE2yooqL?mod=djem_b_barronstech013124