Bond yields are weighing on stocks.getty
Although the overall earnings picture improved, the S&P 500 fell 1.1% this week. Economic data was scarce, but rising yields weighed on equities, particularly growth stocks, which had performed well year-to-date. According to FactSet, 69% of companies have beaten their earnings estimates, which is below the 10-year average of 73%. Earnings season begins to ease this week as only 60 S&P 500 companies are scheduled to report.
winning season
Glenview Trust, FactSet
Mixed earnings, which combine actuals with estimates from yet-to-be-reported companies, are lower than forecasts at the end of the quarter but improved last week. The high earnings growth rate for industrials is misleading as airlines reported a loss in the fourth quarter of 2021 and a profit this quarter. Consumer staples, real estate, health care and materials remain the four sectors expected to post better than forecast December 30th earnings. Energy sector earnings estimates remained stable, keeping the krone with the highest expected growth rate, driven by higher energy prices, with expected earnings rising 58% year-on-year. Berkshire HathawayBRK.B continued to buy shares in Occidental PetroleumOXY (OXY) in 2022 and now owns over 20% of the company. A previous article discussed why Warren Buffett’s Berkshire Hathaway likes its holdings in Occidental Petroleum.
Earnings by Sector
Glenview Trust, FactSet
Blended revenues improved again last week and are well above the expected level at the end of the quarter. Energy, Industrials, Real Estate, Consumer Staples, Health Care, Utilities and Consumer Discretionary have better estimates than at the end of the quarter. Sales in the energy sector illustrate the robust increase in energy commodity prices.
Revenue by Sector
Glenview Trust, FactSet
With 69% of the earnings season complete, the mixed earnings performance at the end of the quarter falls short of expectations. Combining actual results with consensus estimates for companies yet to report, the composite earnings growth rate for the quarter strengthened to -4.9% yoy, below the -3.2% expectation at the end of the quarter. Despite the improvement in earnings expectations for the fourth quarter, expected earnings growth for calendar year 2023 eased again this week and is now 2.5% year-on-year.
Summary of Earnings
Glenview Trust, FactSet
The communications services sector was the largest contributor to mixed earnings improvement for the S&P 500. Earnings increases from Walt DisneyDIS (DIS) and Activision BlizzardATVI (ATVI) were positive for the communications services sector. As previously mentioned, the pressure on margins has become more apparent as sales came in as expected but earnings have been disappointing during this fourth quarter earnings season.
Outside of earnings season, comments from Federal Reserve Chair Powell left the path of future rate hikes data dependent. The Fed’s statement coupled with recent data pointing to a stronger-than-expected economy, including the stunningly resilient jobs report, have pushed bond yields higher relatively quickly. Since last year, rising bond yields have weighed on equities across the board; last week was no exception.
Stock and bond returns
Glenview Trust, Bloomberg
On the back of better economic data and Fedspeak, markets are pricing in two more short-term rate hikes of 25 basis points (0.25%) in March and May, with a possible cut by January 2024. This week has some meaningful financial news Markets and rate hike expectations, January consumer inflation (CPI) and retail sales.
One-Year Forward Fed Funds Futures Rate
Glenview Trust, Bloomberg
Although the more economically sensitive cyclical stocks underperformed over the past week, they have outperformed underlyings since the beginning of the year. This market move in 2023 suggests that fewer concerns about the recession are currently being priced into the market.
Cyclical stocks versus underlying stocks
Glenview Trust, Bloomberg
Headline earnings improved last week but came in below estimates at the end of the quarter. Still, equities have focused more on macroeconomic factors, such as higher bond yields and the rising odds that the US may avoid a recession. Corporates will continue to be particularly sensitive to corporate forward guidance while the risk of a recession in 2023 remains. This week’s consumer inflation (CPI) and retail sales will be key as markets try to anticipate the path of interest rates and the economy.
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I am the Chief Investment Officer of The Glenview Trust Company, which provides wealth management, wealth and financial planning to wealthy families. I appear frequently on US and international television and have been featured on ABC, Bloomberg, Bloomberg Asia, CNBC, CNBC Asia, Fox Business and NHK World. Previously, I was Global Chief Investment Strategist for PNC Asset Management Group. With over $140 billion in assets under management at PNC, I served as the primary driver of asset allocation and model portfolio construction for high net worth individuals, family offices and institutional investors. I began my career on Wall Street as a financial analyst at Salomon Brothers, where I first met Warren Buffett. I have a bachelor’s degree from the University of Dayton and an MBA from the University of Pittsburgh. I also earned Chartered Financial Analyst® (CFA®) and Chartered Market Technician (CMT) designations.
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