April 2023 Review and Outlook
Executive summary
- Mixed data = Mixed performance
- Large & Mega caps outperforming Small & Micro caps
- 1Q Earnings – lowered bar allows for beats, FY guidance in focus
- Gold breaking out to new highs while M2 Money Supply shrinks
- US CDS Spreads jump higher on debt ceiling worries
- May brings about the end of earnings season & start of Russell Reconstitution season (Webinar registry here)
Depending on who you are reading this, the month could have been decent (mega caps) or quite turbulent (small & micro caps). While the first quarter saw stocks rally, the kickoff of 1Q earnings put a bit of a damper on the parade. Despite key earnings metrics running above their one-year averages, companies across industries mentioned negative linearity in Q1. Rewards for earnings beats were also well below the four-quarter average. The US Debt ceiling standoff has also heightened tensions in the market, as witnessed via the US CDS market, where rates are at levels not seen since the crisis in 2008. There is a big question around when the Treasury’s “x-date” is, which can vary a lot based on government cash flows (project spending, hiring, tax receipts), but the estimates seem to range between July and mid-August. Investors are relaying this fear not only in the CDS market but also in short-term treasuries, buying the 1-month bills and selling the 3-month, as you can see below.
Q1 GDP came in at 1.1%, below the consensus of 2.0% and the previous print of 2.6%, but that wasn’t the result of weak consumer spending. In fact, personal consumption expenditure growth was 3.7% in the quarter, up from 1.0% in the fourth quarter of 2022. Spending on goods was +6.5%, with services spending up 2.3%. Headline inflation remained elevated, with CPI MoM reporting an increase of 0.1% vs. 0.2% estimate and a YoY increase of 5.0% vs. 5.1% estimate. Additionally, March core PCE was up 0.3% MoM, in line with consensus and little changed from the February reading. The core PCE Price Index is the Fed’s preferred inflation measurement, and with the recent readings remaining elevated, it is likely the Fed will stick with its rate-hike cycle and hold rates higher for longer. It should also be noted that personal savings rates as a percentage of disposable income increased to 5.1% from 4.8% in February, signaling consumer concern about a potential upcoming recession.
April also saw the first half of 1Q ’23 earnings prints. At the mid-point of the season, S&P 500 companies are reporting their best performance relative to analyst expectations since the end of 2021. Although the number of companies reporting positive EPS surprises and the size of the surprises are above 10-year averages, it should be noted that expectations for the quarter were low going into the prints.
On a total return basis, mega and large caps sharply outperformed small and micro caps, with the Dow Jones returning 2.6%, versus the Russell 2000 and Microcap falling 1.8% and 2.6%, respectively. The S&P 500 returned 1.6%, while the Nasdaq 100 finished higher by 0.5%, and the Nasdaq Composite rose just 0.1%. At the sector level, Communications stocks were the top performers, ending the month higher by 3.8%, followed by Consumer Staples and Energy, which returned 3.6% and 3.3%, respectively. Industrials were the worst-performing sector, ending lower by 1.2%, followed by Consumer Discretionary and Basic Materials ending lower by 0.9% and 0.1%, respectively.
US CDS:
Buy1M Bill & sell 3M bill:
Headline Inflation YoY:
Core Inflation YoY:
Food Inflation YoY:
Energy Inflation YoY:
Gold & M2:
Gold is finally breaking out to new highs while M2 is contracting for the first time ever after surging during the Covid crisis. Government expenditures continue to rise, businesses with debt must roll that over at higher rates, and homeowners with adjustable-rate mortgages see payments climbing, all while lending standards tighten. All those factors point to additional demand for dollars, which normally can be “printed,” but for the first time ever, we see money supply contracting, potentially causing a shortage. This shortage could lead to an increase in default rates and, in turn, lead to a recession in which the Federal Reserve would normally ease financial conditions to help. In our current situation, though, the Fed continues to tighten its policies as inflation remains well above its stated 2% target, so the normal course of action could be tougher than usual. Perhaps investors are front-running this scenario by going back into hard commodities such as gold which is breaking out to new all-time highs.
Earnings:
With 53% of S&P 500 companies reporting Q1 earnings, the results have been mixed. To date, 66% of companies have reported a beat on revenues, with 17% missing estimates and 16% matching. The average beat was just under 2.1%. EPS reports, on the other hand, saw companies beating nearly 80% of the time, above the 5-year average of 77% and the 10-year average of 73%. Energy stocks reported the largest top-line upside with an average beat of ~3.8%, followed by Utilities with 2.9%. Consumer Discretionary saw the largest upside surprise in terms of EPS, with an average surprise of 26.5%, followed by Materials with 17.2%. In aggregate, the 6.8% earnings above estimates are below the 5-year average of 8.4% but above the 10-year average of 6.4%.
On a growth front, the outlook was not as upbeat as the 1Q reports. Presently 68% of companies have reported revenue growth, with 29% declining and 3% flat, with an average growth rate of just under 4.0%. Materials companies took the biggest hit, with only 15% reporting growth, with an average decline of 12.9%. Despite large shocks during the month, Financials reported average revenue growth of 12.4%.
Earnings growth has been mixed, with only 58% reporting growth, 40% cutting, and 2% in line, with an average EPS growth rate of -1.7%. Materials saw the largest decline at 36%, followed by Technology 12.9% and Health Care 12.5%. Only Energy and Industrials reported double-digit earnings growth at 27.6% and 26.3%, respectively.
In terms of 2-day price action following earnings prints, Consumer Staples saw the largest gains with an average jump of 2.0%, followed by Consumer Discretionary and Technology at 0.4% and Real Estate at 0.3%. All other sectors saw 2-day declines after reporting, with Energy stocks surprisingly falling the hardest at -7.25%, followed by Utilities at -3.9%, and Communications at -3.6%.
The forward 12-month PE for the S&P 500 is 18.1, which is slightly below the five-year average (18.5), but above the 10-year average (17.3), according to FactSet.
Rates:
Yield Curve:
Fed Expectations:
Looking Ahead:
The month of May kicks off with a Federal Reserve meeting on the 3rd, at which the board is expected to raise interest rates by another 25bps to 5.25%. We also continue to have pivotal economic data throughout the month, starting with jobs numbers, CPI mid-month, and GDP + Sentiment to close it out. Outside of the macro lens, May will also see the initial Preliminary Additions and Deletions list for the FTSE Russell indices. We will be hosting a webinar along with FTSE Russell and Barclays to discuss what to expect, which you can register for here.
The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as , either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Other Topics
US Markets Central Banks Earnings
The Market Intelligence Desk Team
Nasdaq
Nasdaq’s Market Intelligence Desk (MID) is designed to provide critical touch-points for timely trading analysis and market information.