February 2023 Review and Outlook
Executive summary:
- Markets moved lower as the Fed rate path pointed higher
- Employment was strong, while inflation remained sticky
- Corporate earnings growth was negative for the first time since Q3 2020
- Energy worst performing sector
- Gold saw its worst monthly drop since June ‘21
While January saw stocks rally sharply on easing Fed expectations, February painted a different picture. The month kicked off with the Federal Reserve raising the benchmark rate 25bps to 4.75% (upper bound), with another 25bps hike expected in both March and May. The market had been pricing in rate cuts in the back half of the year, but those expectations have largely disappeared with the assumption now that the Fed will keep rates higher for longer. The terminal rate has risen to ~5.4%.
Part of the move higher in rate expectations was the hot jobs number as Change in Nonfarm Payrolls came in +517k, substantially higher than the expected 189k. Change in average hourly earnings remained above 4.4% YoY, with Leisure and Hospitality seeing the largest gains at 7.0%. Following the hot jobs print, inflation data was mostly in line with expectations in terms of MoM readings, although services inflation remained elevated. Housing prices continued to cool as mortgage rates jumped higher, while commodities continued their move lower. January CPI MoM was in line with expectations of 0.5%, while YoY came in at 6.4%, above expectations of 6.2%. Furthermore, January PPI data came in hotter than expected, reporting a MoM increase of 0.7% versus 0.4% expected and a YoY increase of 6.0%, above the expected 5.4%. Finally, the headline PCE data came in hotter as well, reporting an increase of 0.6% MoM vs. 0.5% estimate and 5.4% vs. 5.0% on a YoY basis.
Outside of the economic data and FOMC rate decision, February also saw the second half of 4Q ’22 earnings prints. The market rewarded positive EPS surprises more than average while punishing negative surprises much less than average. According to FactSet, companies reporting positive EPS surprises have seen a price increase of 1.1% in the two days leading up to and two days following the print, which is above the 5-year average of 0.9%. On the flip side, negative surprises have resulted in a decrease of 0.6% compared to the 5-year average of -2.2%.
On a total return basis, large-cap growth stocks were the top performers for the month, with the Nasdaq 100 falling only 0.4%, while the Russell 1000 Growth index slid 1.2%. Large-cap value stocks were the hardest hit as the Russell 1000 Value index fell 3.5%, followed by the Russell Microcap index falling 2.9%. At the sector level, Energy stocks were a clear underperformer falling 7.1%, followed by REITs and Utilities, which slid 6.2% and 5.9%, respectively. The technology sector was the only positive on the month as it climbed 0.4%.
Employment:
Average Hourly Earnings YoY:
CPI Supercore Inflation – YoY:
CPI Supercore Inflation – MoM:
Headline Inflation MoM:
Core Inflation MoM:
Food Inflation MoM:
Energy Inflation MoM:
Gold:
Earnings:
With 96% of S&P 500 companies reporting Q4 earnings, the results have been subpar. Just over 68% of companies reported positive EPS surprises, which is below the 5-year average of 77% and the 10-year average of 73%. The average EPS beat has been ~1%, well below the 5- and 10-year averages of 8.6% and 6.4%, respectively. Negative EPS surprises from the Communications sector have been the biggest drag on overall earnings, while Consumer Discretionary has been the biggest outperformer.
On the revenue growth front, just over 70% of companies have reported earnings growth, with an average growth of 5.6%. The 5.6% revenue growth is the lowest rate for the index since Q4 2020, when revenue contracted 3.2%. In aggregate, nine of 11 sectors reported year-over-year sales growth, led by Energy, Consumer Discretionary, and Industrials, while Materials and Technology reported negative sales growth.
Earnings growth has been mixed, with only four of 11 sectors reporting year-over-year growth, led by Energy 55.3%, Consumer Staples 36.4%, and Consumer Discretionary 26.2%, while Real Estate eked out a positive 7% growth rate. Communications contributed the largest decline as earnings contracted 27.7%, followed by Industrials, which was down 24.5%.
The forward 12-month PE for the S&P 500 is 17.7, which is slightly below the five-year average (18.5), but above the 10-year average (17.2).
In terms of price action following earnings prints, Industrials saw the biggest positive 2-day move, climbing an average of 1.4%, followed by Financials 1.0%, and Consumer Discretionary 0.9%. Consumer Staples, Real Estate, and Technology rose between 0.2-0.5%. Energy saw the largest drawdowns, falling an average of (1.0%), followed by Utilities (0.8%). Materials, Communications, and Health Care stocks also slid, falling between 0.4-0.1%.
Rates & Housing:
The 2YR10YR spread continued its inversion, finishing the month at -89bps. After remaining relatively steady since 4Q ’22, the 2YR yield shot up to new highs in February, ending just below 4.8%, while the 10YR remained below its October ’22 highs, ending at ~3.92%.
Mortgage rates also jumped higher during the month, with the average 30-year fixed rate near 6.8%. The S&P/Case-Shiller U.S. National Home Price Index (non-seasonally adjusted) reported a 5.8% annual gain in December (3-month average of October, November, and December closing prices), down from 7.6% in the previous month. After seasonal adjustments, the National Index posted a -0.8% month-over-month decrease.
US 2YR Yield:
US 10YR Yields:
US 30YR Yields
2YR10YR Spread:
Housing:
Looking Ahead:
There are certainly several key events to keep an eye on in March, including the FOMC decision on the 22nd. The market is currently expecting another 25bp rate hike from the committee, but recent Fed minutes showed that some members were in favor of a 50bp hike during the February meeting. In the days leading up to the meeting, we will see the Nonfarm Payrolls number on the 10th, which surprised to the upside in February, followed by the ever-important CPI release on the 14th. Stocks sold off in the month as bond yields rose, so the bond market will continue to have a say in equity valuations. While no longer front and center, the continuing war in Ukraine remains a constant threat to markets, with tensions escalating. Furthermore, the recent downing of the Chinese “spy balloon” eroded relations between the two countries, and any further issues between the world’s two largest economies could impact trade at a high level.
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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.