The major benchmarks in U.S. ended slightly lower last week, as the DOW, S&P 500 and NASDQ changed by less than 1%. Sector performance was mixed, as mega-cap technology, media and entertainment were among the weakest performers, while banks were little changed. Cyclicals were mixed, and defensives such as consumer staples, utilities were among the top outperformers. Treasuries were slightly weaker with a bit of curve flattening. The yield on 10-year Treasuries advanced four basis points to 3.57%
The dollar index ended the week higher. The Bloomberg Dollar Spot Index was little changed, the euro rose 0.2% to $1.099. The price of U.S. crude oil fell more than 5% for the week to less than $78 per barrel. The decline marked a reversal from recent weeks’ gains and left oil prices around their levels of a month earlier when an announcement of production cuts by Saudi Arabia and other countries sent prices higher.
European stocks recovered from last month’s selloff that was caused by banking-sector worries, with the region’s main benchmark hitting its highest level since February 2022. The major benchmarks in Europe ended higher last week, as the EURO STOXX 50 and the STOXX Europe 600 crawl 0.41% and 0.45% higher. The ECB is expected to raise borrowing costs again on May 4, even though officials are wary of making predictions on the size of the move as they await key data on inflation and bank lending. Germany’s 10-year yield advanced four basis points to 2.48%
This week, the Fed’s Beige Book, which is based on reports from businesses across the country as of April 10, was released and showed that, although the economy remains in expansion mode, slowing signs have appeared, suggesting that the labor market and the economic activity are cooling, growth will weaken further and likely lead to a recession. The number of districts reporting expansion of economic activity fell to its lowest level since May 2020. Many districts noted lending standards tightened after the increased financial stress last month. Housing activity continues to slow as high mortgage rates and slower economic growth weigh on housing demand. We expect that the housing market will continue to weaken throughout 2023, pushing inflation closer to the 2% target of the Federal Reserve. Existing home sales fell by 2.4% month over month in March. Existing home sales fell across the United States, median home prices increased by 3.3% month over month and declined by 0.9% year over year in March. Going forward, we expect home price growth to continue to decline even though the tightness of the home supply will prevent home prices from falling significantly in the near term. The Conference Board’s Leading Economic Index fell by 1.2% month over month in March; the 12th consecutive drop. The weakness was across the index’s components with Institute for Supply Management new orders, building permits and consumer expectations being the top negative contributors.
This week, there have been signs that the congress is moving toward an agreement on the debt ceiling. House Speaker Kevin McCarthy’s plan is to raise the debt ceiling by lowering discretionary spending by around 5%, back to 2022 levels. This bill would increase the debt ceiling enough to cover expenses through March 2024 and lead to another debt ceiling debate then. If McCarthy’s plan fails, it could lead to a negotiation between moderate Republicans and Democrats to create another debt ceiling agreement.
S&P 500 earnings season update, according to FACTSET 18% of the companies in the S&P 500 have reported results for Q1 2023. Of these companies, 76% have reported EPS above estimates, which is below the 5-year average of 77%. In aggregate, companies are reporting earnings that are 5.8% above estimates, which is below the 5-year average of 8.4%. In terms of revenues, 63% of S&P 500 companies have reported revenues above estimates, which is below the 5-year average of 69%. In general, companies are reporting revenues that are 1.8% above the estimates, which is below the 5-year average of 2.0%.
Looking forward, for Q2 2023, analysts are projecting earnings decline of -5.0%. For Q3 2023 and Q4 2023, analysts are projecting earnings growth of 1.6% and 8.5%, respectively. For all of CY 2023, analysts predict earnings growth of 0.8%. The forward 12-month P/E ratio is 18.2, which is below the 5-year average (18.5) but above the 10-year average (17.3). It is also slightly above the forward P/E ratio of 18.1 recorded at the end of the first quarter. During this coming week, 180 S&P 500 companies (including 14 Dow 30 components) are scheduled to report results for the first quarter.
We expect volatility to persist in the next few weeks the equity and the bond market until we see a consistent decrease in inflation, and the markets become comfortable with a “data-dependent” Fed which now focuses on the cumulative effects of rate hikes. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure. We’ve recently become more constructive on European equities, as the energy recession wasn’t as severe as anticipated. In the United States, large-cap equities provide an attractive blend of quality, yield, and growth at a reasonable value, even though earnings growth show signs of fatigue. For fixed income, we recommend an overweight to short- and longer-dated bonds. We remain defensive in our credit positioning and higher in credit quality.