Week of 3/27/2023 | StreetFins®

1. A Strong Week

The stock market had a strong week, with the S&P 500 and NASDAQ both gaining more than 3% and the Dow rising for the second week in a row. This marks the third consecutive week of gains, and the market is recovering from a tough February. The first quarter ended with a significant difference among the major U.S. stock indexes. The NASDAQ had a quarterly total return of 17.0%, largely due to its large weighting in technology stocks that performed well over the quarter. The S&P 500 had a more modest gain of 7.5%, while the Dow was up only 0.9%. Meanwhile, U.S. government bond yields rose after three consecutive weeks of declines, with the 10-year U.S. Treasury bond yielding about 3.49% on Friday. This is up from 3.38% the previous week but down from a recent peak of 4.07% on March 2.

However, there are some concerning economic indicators. The University of Michigan reported that its survey of U.S. consumer sentiment fell sharply, marking the first decline in four months. A growing number of consumers expect a recession is ahead, although their near-term views of inflation have moderated. Furthermore, a report released on Friday showed that the U.S. Federal Reserve’s preferred gauge for tracking inflation rose 0.3% from January to February. This is down sharply from the 0.6% rate in the previous monthly update. On an annual basis, the Personal Consumption Expenditures Price Index rose 5.0%, down from the prior month’s 5.3% figure.

Investors should remain vigilant in the face of these mixed economic signals. While the stock market is showing signs of recovery, concerns about consumer sentiment and inflation may indicate potential headwinds in the future. As always, it is important to diversify investments and stay informed about market trends and indicators.

2. Surprise Cuts

Oil prices rose on Sunday after a surprise cut in production was announced by several OPEC+ nations. Saudi Arabia’s Ministry of Energy revealed that the country will implement a voluntary cut of 500,000 barrels a day from May until the end of 2023, along with other countries. The production cuts aim to stabilize the oil market, which has been experiencing volatility and unpredictability due to the ongoing banking crisis in the US and Europe, global economic uncertainty and unpredictable energy policy decisions. The announcement sent prices soaring, with West Texas Intermediate crude for May delivery topping $80 a barrel and Brent crude, the global benchmark, surpassing $85 a barrel. The production cuts come after a first quarter that saw a sharp decline in crude prices. Ole Hansen, chief commodities strategist at Saxo Bank, said that the announcement “came out of the blue” and that producers were clearly frustrated by the recent slump which was more than fundamentally driven. The move also comes as the US, Europe, and elsewhere continue to battle inflation. The new cuts should make for a significant draw on crude inventories in the second quarter.

3. Food and Clothing

The first quarter of 2023 has witnessed a decline in earnings expectations for companies in the S&P 500 index as analysts and dozens of companies grew more pessimistic about their earnings by almost the same percentage. The ongoing banking liquidity concerns and fears of a broader economic recession have sharpened the concerns of Wall Street analysts, leading them to expect a drop of 6.6% in the first quarter’s per-share profit for companies in the S&P 500 index. This drop would be the biggest since the second quarter of 2020, when the pandemic’s toll on the economy was at its worst and sent earnings 31.8% lower.

Analysts have also cut their first-quarter estimates on the bottom line at a steeper rate than average, lowering their earnings-per-share estimates by 6.3% from Dec. 31 to March 30, which is more than double the average decline of 2.8% during a quarter over the past five years. 79 companies in the S&P 500 have so far put out downbeat earnings forecasts, which is above the average tally of the past five years.

The dimmer sentiment on corporate earnings comes as Wall Street worries about the impact of higher prices and higher interest rates on the economy. Many businesses have raised prices to cover costs and protect or pad their bottom lines, following an initial round of supply shocks in 2021 and 2022 related to COVID-19’s squeeze on supply chains and the war in Ukraine. Some analysts have said those efforts to guard profit margins via higher prices have played a large role in pumping up inflation overall.

Additionally, the recent banking-sector turmoil may affect the economy mainly through tighter lending standards and a reduction in the availability of credit, leading to tighter credit conditions and affecting borrowing. Analysts at Oxford Economics have stated that they expect a recession to hit in the second half of 2023, with a peak-to-trough GDP decline of around 1.5%.

Despite the banking ruptures, Wall Street has remained blasé on the potential impact on financial-industry profits. FactSet expects earnings from the financial sector to grow 3.2% during the first quarter, and it expects the sector to lead the S&P 500 overall on revenue growth, with gains of 9.1%. More broadly, online retail giant Amazon.com Inc. is seen leading a rebound in the consumer discretionary sector, as higher prices in 2022 forced more shoppers to spend their savings on essentials like gas, rent, and groceries rather than online shopping. Profit gains are also expected in the energy sector, which has benefited from higher oil prices.

Four S&P 500 companies will report first-quarter results in the week ahead. The highlights for the week center on food, where prices have stayed high, and clothing, where discounts have proliferated. Food prices, and the food industry’s command over them, are critical indicators to watch out for as investors will try to make sense of how the industry is navigating the supply chain and inflationary pressures. For instance, the demand for denim is slowing, with signs that chinos and cargo pants have fallen more into favor as people return to offices and formal occasions. However, Levi’s executives disagree and expect the company’s earnings to remain stable.

Summary:

The stock market had a strong week with the S&P 500 and NASDAQ both gaining more than 3%, marking the third consecutive week of gains. However, there are concerns about consumer sentiment and inflation. Several OPEC+ nations announced a surprise cut in production, aiming to stabilize the oil market, which sent oil prices soaring. Analysts and dozens of companies grew more pessimistic about their earnings in the first quarter of 2023. Wall Street worries about the impact of higher prices and higher interest rates on the economy, and some analysts have said higher prices played a large role in pumping up inflation.