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Market Snapshot
briefing.com
| Dow | 33818.30 | +121.50 | (0.36%) | | Nasdaq | 11788.25 | -67.61 | (-0.57%) | | SP 500 | 4079.58 | -10.83 | (-0.26%) | | 10-yr Note | +3/32 | 3.83 |
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| | NYSE | Adv 1293 | Dec 1639 | Vol 936 mln | | Nasdaq | Adv 2291 | Dec 2108 | Vol 4.8 bln |
Industry Watch
| Strong: Health Care, Consumer Staples, Utilities, Industrials, Financials, Consumer Discretionary |
| | Weak: Energy, Materials, Information Technology, Communication Services, Real Estate |
Moving the Market
-- Follow through from yesterday's sell off fueled by worries about the Fed raising rates more than expected
-- Treasury yields backing down from overnight highs tempering some selling pressure in the stock market
-- Downside leadership from the mega cap space
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Closing Summary
17-Feb-23 16:25 ET
Dow +129.84 at 33826.64, Nasdaq -68.56 at 11787.30, S&P -11.32 at 4079.09
[BRIEFING.COM] The stock market opened decidedly weak, carrying over yesterday's downside momentum, as investors looked to take some money off the table after a big run recently. Concerns about the Fed raising rates higher than expected for longer than expected also contributed to the early weakness.
Those concerns were stoked again today by Fed Governor Michelle Bowman (FOMC voter) saying that rate hikes should continue until there is "a lot more" progress on inflation, according to Reuters.
The general tone started to shift, however, as market rates backed down from overnight highs. The 2-yr note yield, which hit 4.71% overnight, settled the session down two basis points to 4.61%. The 10-yr note yield, which hit 3.92% overnight, also fell two basis points today to 3.83%.
Ultimately, the main indices closed the session near their best levels of the day, which had the Dow Jones Industrial Average and Russell 2000 sporting slim gains. The S&P 500 and Nasdaq had their upside moves limited somewhat by downside pressure from the mega cap space. The Vanguard Mega Cap Growth ETF (MGK) closed down 0.9% versus a 0.2% loss in the Invesco S&P 500 Equal Weight ETF (RSP) and a 0.3% loss in the S&P 500.
Market internals reflected the shift in sentiment today. Shortly after the open, decliners led advancers by a greater than 3-to-1 margin at the NYSE and a greater than 2-to-1 margin at the Nasdaq. By the close, decliners led advancers by a 4-to-3 margin at the NYSE while advancers had a slim lead over decliners at the Nasdaq.
Roughly half of the 11 S&P 500 sectors logged a gain this session led by the defensive-oriented consumer staples (+1.3%), utilities (+1.0%), and health care (+0.9%). Meanwhile, the energy (-3.7%) sector was the worst performer by a wide margin amid falling oil prices ($76.57/bbl, -1.91, -2.4%).
- Nasdaq Composite: +12.6% YTD
- Russell 2000: +10.5% YTD
- S&P Midcap 400: +9.7% YTD
- S&P 500: +6.2% YTD
- Dow Jones Industrial Average: +2.1% YTD
Reviewing today's economic data:
- January Import prices -0.2%; Prior was revised to -0.1% from 0.4%
- January Import Prices ex-oil 0.3%; Prior 0.4%
- January Export Prices 0.8%; Prior was revised to -3.2% from -2.6%
- January Export Prices ex-ag. 0.8%; Prior was revised to -3.3% from -2.7%
- January Leading Indicators -0.3% (Briefing.com consensus -0.3%); Prior was revised to -0.8% from -1.0%
As a reminder, bond and equity markets will be closed on Monday for Presidents Day.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 9:45 a.m. ET: Preliminary February IHS Markit Manufacturing PMI (prior 46.9) and preliminary IHS Markit Services PMI (prior 46.8)
- 10:00 a.m. ET: January Existing Home Sales (prior 4.02 mln)
Treasury yields pullback
17-Feb-23 15:35 ET
Dow +145.23 at 33842.03, Nasdaq -70.00 at 11785.86, S&P -9.58 at 4080.83
[BRIEFING.COM] The main indices have been sinking somewhat, but remain well off session lows.
The 2-yr note yield fell two basis points today, and rose 10 basis points this week, to 4.61%. The 10-yr note yield fell two basis points today, and rose nine basis points this week, to 3.83%.
As a reminder, bond and equity markets will be closed on Monday for Presidents Day.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 9:45 a.m. ET: Preliminary February IHS Markit Manufacturing PMI (prior 46.9) and preliminary IHS Markit Services PMI (prior 46.8)
- 10:00 a.m. ET: January Existing Home Sales (prior 4.02 mln)
Market near best levels of the day
17-Feb-23 15:00 ET
Dow +121.50 at 33818.30, Nasdaq -67.61 at 11788.25, S&P -10.83 at 4079.58
[BRIEFING.COM] The main indices trade near their best levels of the day. The Dow Jones Industrial Average has extended its gains, up 0.3%.
Energy complex futures settled the session lower. WTI crude oil futures fell 2.4% to $76.57/bbl and natural gas futures fell 4.8% to $2.29/mmbtu.
On a related note, the S&P 500 energy sector (-3.3%) remains in last place by a wide margin.
Albemarle, lithium peers fall on reports of EV battery discounts in China
17-Feb-23 14:30 ET
Dow +49.18 at 33745.98, Nasdaq -115.82 at 11740.04, S&P -22.75 at 4067.66
[BRIEFING.COM] The S&P 500 (-0.56%) is slightly higher off levels from half an hour ago, but still down about 22 points.
S&P 500 constituents Albemarle (ALB 257.22, -28.40, -9.94%), Halliburton (HAL 36.34, -2.24, -5.81%), and Zebra Tech (ZBRA 320.46, -12.98, -3.89%) pepper the bottom of the standings. ALB and lithium peers are slipping on Friday after Reuters reported EV battery manufacturer CATL was offering discounts to customers in light of falling lithium prices, while HAL and oil peers slip owing in part to declines in crude prices, and ZBRA fades off multi-session gains post earnings.
Meanwhile, GE HealthCare (GEHC 72.99, +2.08, +2.93%) is among the top five performers in the S&P today in light of Mizuho's initiation of GEHC at "Buy".
Gold makes 2023 low, adds slightly to weekly losses on Friday
17-Feb-23 14:00 ET
Dow -54.14 at 33642.66, Nasdaq -158.89 at 11696.97, S&P -35.46 at 4054.95
[BRIEFING.COM] The broader market has consolidated near lows in the last half hour, the tech-heavy Nasdaq Composite (-1.34%) down almost 160 points.
Gold futures settled $1.60 lower (-0.1%) to $1,850.20/oz, down -1.30% this week, finding their lowest levels this year.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $103.92.
Page One
Last Updated: 17-Feb-23 09:02 ET | Archive
Some knocks in stock market's complacent engine
Everything was going according to plan yesterday and then suddenly it wasn't. There was weakness at the open that had the S&P 500 down as much as 1.4% and trading below 4,100. The breach of that key level ignited renewed buying interest, and with a little more than an hour to go in the trading day, the S&P 500 was close to unchanged.
The final hour, however, saw a cascade of selling interest that completely unwound the recovery bid. The S&P 500 closed at 4,090, down 1.4% for the session.
The precipitant for the late sell-off was attributed to a remark from St. Louis Fed President Bullard, who said he wouldn't rule out supporting a 50-basis point rate hike at the March meeting. Mr. Bullard does not have a vote on the 2023 FOMC; nonetheless, his view will still be heard at the March meeting.
Notably, Cleveland Fed President Mester said earlier in the day that she advocated for a 50-basis point rate hike at the February 1 meeting. She does not have a vote on the 2023 FOMC either.
The stock market's reaction to Mr. Bullard's comment seemed overdone considering (a) he doesn't have a vote on the 2023 FOMC (b) it was already understood that he is among the most hawkish Fed officials and has urged front-loading rate hikes in the past and (c) the market was already engaged in a nice rebound effort, having been fully aware of what Ms. Mester said earlier in the day.
Strikingly, the initial reaction in the Treasury market to Mr. Bullard's comments wasn't nearly as pronounced as the stock market's reaction was. This suggested to us that the stock market knew it was running on borrowed rally time, having largely ignored to this point the idea, which had been apparent in the bond market since the January employment report, that the Fed is going to keep raising rates and will leave rates higher for longer.
If nothing else, the weight of the remarks from Ms. Mester and Mr. Bullard crystallized a few things for the stock market: (1) It had grown too complacent with its thinking and (2) There might now be a concerted effort on the part of Fed officials in coming days and weeks to "talk tough" about policy considerations in a bid to "talk down" the overheated stance of risk assets.
The timing of Mr. Bullard's remark, then, provided the perfect excuse to take some money off the table -- and that's what market participants did.
They are still taking this morning, too. The S&P 500 futures are down 22 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 91 points and are trading 0.7% below fair value, and the Dow Jones Industrial Average futures are down 110 points and are trading 0.3% below fair value.
Those indications have improved from earlier thanks to the arrival of some pleasing import-export price data for January. Briefly, import prices declined 0.2% month-over-month. Excluding fuel, they were up 0.3% month-over-month, but up only 0.8% year-over-year versus up 7.0% for the 12-month period ending January 2022. Export prices were up 0.8% month-over-month. Excluding agricultural products, they were also up 0.8%, but up only 1.7% year-over-year versus up 14.6% for the 12-month period ending January 2022.
This data followed on the heels of CPI and PPI data this week that was shy of pleasing, evidenced by what has unfolded in the Treasury market.
Currently, the 2-yr note yield is up another six basis points to 4.69% and the 10-yr note yield is up another four basis points to 3.88% (it hit 3.92% overnight), trading exactly where it was when the year began.
The interplay between stocks and bonds -- and the dollar -- promises to ramp up as a driver of investor sentiment. Yesterday, sentiment hit the off ramp to attend to some knocks in its engine of complacency.
-- Patrick J. O'Hare, Briefing.com
Deere harvesting some nice gains as strong farming fundamentals drive beat-and-raise report (DE)
Buoyed by healthy farming fundamentals and rising spending on infrastructure projects, Deere (DE) posted an impressive beat-and-raise 1Q23 earnings report, sending shares sharply higher. Like Caterpillar (CAT), which reported earnings in late January, DE reaped the benefits of higher prices for its machinery, offsetting persistent manufacturing, labor, and freight cost pressures.
- However, unlike CAT, DE beat EPS estimates -- by a wide margin -- partly because it has less exposure to negative FX headwinds. With roughly 57% of its revenue coming from overseas markets, CAT is especially vulnerable to the strengthening dollar.
- In fact, in Q4, negative FX impacts accounted for a $0.41/share headwind to CAT's EPS. The company ended up missing EPS expectations by $0.17. DE, on the other hand, generates about 46% of its revenue from international markets.
Beyond the FX factors, the strong farming industry is a major catalyst behind DE's remarkable performance.
- This is reflected in the 55% yr/yr surge in net sales for the Production & Precision Agriculture segment, which makes combines, mid-size tractors, and harvesters.
- By far DE's largest segment at 46% of total Q1 revenue, this segment is benefitting from high crop prices and the accompanying rise in farming incomes. With more money to spend, farmers are upgrading their equipment and investing in pricier precision agriculture machines to improve yields and efficiency.
- Supply chain disruptions curtailed production in this business in 2022, especially in the first half of the year, but it's clear that those issues have now been resolved.
- Along with price increases, DE experienced higher shipment volumes, catapulting the segment's operating margin to 23.2% from 8.8% in the year-earlier period.
- Construction & Forestry, the segment that competes the most with CAT, performed well in its own right. Net sales jumped by 26% to $3.2 bln while operating margin expanded by 880 bps yr/yr to 19.5% as strong demand for heavy machinery like loaders, dozers, and excavators enabled DE to rise prices without sacrificing volume.
- The same drivers that supported CAT's comfortable top-line beat in Q4, such as rising infrastructure spending and high commodity prices, also boosted DE's results in this segment.
- Given its higher exposure to the weaker consumer end market, it's unsurprising that DE's Small Agriculture & Turf segment lagged the other businesses. Still, net sales for riding mowers, utility tractors, and other smaller equipment increased by 14% yr/yr to $3.0 bln with operating margin up by 80 bps to 14.9%.
With a strong start to the year in hand, DE bumped its FY23 net income guidance higher to $8.75-$9.25 bln from $8.0-$8.5 bln. The bullish outlook eases concerns that an economic slowdown, or worse, will put a halt to DE's run of strong results.
AutoNation is supercharged following upbeat Q4 results buoyed by an improving new auto market (AN)
The new car market lifted AutoNation's (AN +9%) Q4 results, propelling its sizeable earnings beat in the quarter, which also marked a significant reversal from the double-digit miss it posted last quarter. The auto retailer that sells new and used vehicles also topped revenue estimates in Q4. As a result, investors are supercharging AN's stock, sending it to record highs today.
- New auto retail unit sales climbed 4% yr/yr, assisting sales growth of 8% to $3.1 bln. The improving new auto market helped offset a constrained used market, where unit sales fell 9% yr/yr, causing an 8% decline in sales to $2.2 bln. Meanwhile, after-sales revenue, AN's parts and services division, grew a respectable 7% yr/yr to $67 mln.
- Although improving new vehicle availability was a significant factor in AN's robust new vehicle sales growth in Q4, supply remains tight. Management noted that days of inventory are still historically low, sitting around 19, compared to a more-normal 30-45. OEMs like Toyota (TM), Volkswagen (VWAGY), and General Motors (GM) have noted that although semiconductor supply has improved, supply chain disruptions persist, causing lingering production constraints.
- AN is still selling vehicles at or above MSRP, underscoring the ongoing shortages in the new car market.
- Still, AN's new vehicle sales growth shows that demand is relatively healthy even as high prices and interest rates create some apprehension amongst potential buyers. Part of this is likely due to the lengthy new car constraints since the pandemic, creating pent-up demand.
- Another aspect likely stems from the limited used vehicle supply. AN ramped up its "We'll Buy Your Car" efforts to help improve its used vehicle inventory. Nevertheless, CEO Michael Manley mentioned that supply, particularly surrounding cars around three to four years old, which comprise a meaningful chunk of used car sales, will remain tight for at least the next six months.
Overall, AN's exposure to the new auto market substantially affected its outperformance in Q4. Its peers, CarMax (KMX) and Carvana (CVNA), exclusively operate in the used auto market, a primary driver behind their underwhelming results in recent quarters. For example, KMX paused hiring and share buybacks after poor demand for older vehicles in NovQ clipped its headline numbers. Management mentioned that not everybody wants a more aged, higher mileage car, explaining why the relatively new three to four-year-old vehicles are the biggest component of used vehicle sales for AN. Although new vehicle supply will likely remain tight during 2023, there are signs that it is improving, which could keep the wind at AN's back.
Lastly, CVNA, which is ticking up in sympathy with AN today and reports Q4 earnings on February 23, may not share similar success as AN due to its reliance on the used car market.
DoorDash delivering some losses today, but Q4 report shows that demand is holding up well (DASH)
DoorDash (DASH) missed 4Q22 GAAP EPS expectations by a wide margin, but the company's earnings report still initially satisfied the appetites of investors who were hungry for signs of progress from the leading food delivery company. The announcement of a $750 mln share repurchase program certainly didn't hurt, either, as DASH looks to reduce the dilutive impact from the stock issuance used to acquire Finnish food delivery company Wolt last year.
- After that initial knee-jerk move higher, the stock has cooled off alongside a broader sell off in the market that has particularly hit growth stocks. It's worth pointing out that DASH shares had rallied by about 20% since the end of January, so there's likely some profit-taking at play today.
- DASH also announced a shake-up at the executive level with President and COO Christopher Payne departing on March 1, 2023. Payne has been responsible for DASH's expansion into new delivery services, such as grocery, which are growing rapidly.
- In fact, grocery achieved Marketplace GOV growth of about 100% in both Q3 and Q4, while revenue for newer delivery categories reached $1.8 bln in Q4.
- His departure could be creating some angst that this momentum will be disrupted. Payne will be replaced by Ravi Inukonda, who currently serves as Vice President of Finance and Strategy.
- Those aforementioned signs of progress primarily came in the form of a 149% yr/yr surge in adjusted EBITDA to $117 mln, comfortably exceeding the midpoint of DASH's prior guidance of $85-$120 mln. Since the GAAP EPS number includes charges related to DASH's acquisition of Wolt, the adjusted EBITDA metric is seen as a better gauge for the company's progress on profitability.
- A combination of cost-cutting initiatives, including a round of layoffs in November that impacted 1,250 employees, and higher operating efficiencies as a result of increased order volume is underpinning DASH's adjusted EBITDA growth. Additionally, fewer refunds, credits, and promotions helped push Q4 net revenue margin higher by 100 bps yr/yr to 12.6%.
- Predictably, revenue and Marketplace GOV growth continues to slow from the sky-high levels seen during the depths of the pandemic. Besides a return to normalcy that has brought people back to in-restaurant dining, rising delivery fees are creating another major headwind for DASH and competitors like Uber (UBER) Eats. However, demand is holding up better than many had anticipated, even as monthly budgets are strained by high inflation.
- In Q4, Marketplace GOV grew by 29% yr/yr to $14.4 bln, ahead of DASH's prior forecast of $13.9-$14.2 bln. The company's acquisition of Wolt is paying off as its Marketplace GOV jumped by 50% to €1.0 billion. Already boasting an estimated market share of about 65% in the U.S., DASH believes that it picked up share in the U.S. and across many of its international markets in Q4.
Lastly, DASH provided a solid outlook for 1Q23 and FY23. For Q1, the company guided for Marketplace GOV $15.1-$15.5 bln and adjusted EBITDA of $120-$170 mln -- both of which exceeded analysts' expectations. The midpoint of these guidance ranges equates to Marketplace GOV and adjusted EBITDA growth of 24% and 169%, respectively. In our view, there was plenty to like regarding DASH's results and outlook and the weakness today seems like a sell-the-news reaction in a weak tape.
Applied Materials struggles to etch out gains despite solid JanQ numbers and AprQ guidance (AMAT)
Despite registering upside on its top and bottom lines in Q1 (Jan), Applied Materials (AMAT) is struggling to etch out meaningful gains today. The semiconductor equipment giant, whose most prominent customers include Samsung (SSNLF), Taiwan Semi (TSM), and Intel (INTC), also forecasted Q2 (Apr) earnings and revenue in-line with consensus, a win given the gloomy demand backdrop.
Economic conditions remain tough; AMAT reiterated that 2023 will be a down year for wafer fab equipment (WFE) spending, repeating similar recent remarks from peers Lam Research (LRCX), KLA Corp (KLAC), and ASML (ASML). However, AMAT's bullish tone on the long-term remained unchanged in Q1, expressing confidence that secular trends will create opportunities for the company to outpace the semiconductor and WFE markets.
- AMAT's market position and multiple lines of business have also assisted in defending against the unfavorable economic situation. Over half of AMAT's revenue stems from leadership businesses, where its market share stands at around 50%. At the same time, its services division adds steady cash flows, with over 60% of sales generated from long-term subscription agreements. AMAT stated that its service business is on track for positive growth in 2023 despite the adverse impact of the current U.S. export control regulations.
- These positives helped fuel AMAT's sturdy headline numbers in Q1, boasting 7.5% sales growth yr/yr to $6.74 bln, hitting the midpoint of its $6.3-7.1 bln range, and adjusted EPS of $2.03, reaching the higher end of its $1.75-2.11 forecast. Meanwhile, non-GAAP gross margins expanded by 80 bps sequentially to 46.8%, driven by improved manufacturing and logistics costs alongside pricing adjustments.
- The near term will be rocky, but many of AMAT's bright spots from Q1 are trickling into Q2. The company expects adjusted EPS of $1.66-2.02 and revs of $6.0-6.8 bln. By Q3 (Jul), AMAT also expects to recoup all of the $250 mln impact from a cybersecurity event by one of its suppliers that is expected to disrupt Q2 shipments.
- AMAT pointed out that it expects to work through its backlog to normalize lead times, causing it to decline sometime this year after nine-straight quarters of expansion. AMAT commented that the ability to work down its backlog is more a sign of improving supply chains than it is a sign of meaningfully slowing order growth.
The semiconductor equipment industry is amid strong turbulence as the macroeconomy faces intense inflationary pressures. LRCX mentioned last month that customers across all segments are exercising caution. AMAT's customers expressed similar difficulties.
However, there appears to be light at the end of the tunnel. Samsung noted that demand for some of its products may recover in 2H23. INTC expressed similar optimism, citing a recovery from China as the reason. Additionally, TSM observed some initial signs of demand stabilization last month. As such, although AMAT may experience heavy volatility this year as macroeconomic headwinds play out, demand recovery could occur as early as later this year. At the same time, the long-term picture remains buoyant.
The Big Picture
Last Updated: 17-Feb-23 15:36 ET | Archive
Second half earnings estimates at risk (along with the economy)
The fourth quarter earnings reporting period is not over yet, but it is mostly over. More than 80% of S&P 500 companies have reported their results. In aggregate, they have been about as weak as expected, which, in reality, means they have been worse than expected.
When we provided an earnings preview on January 12, we noted that S&P 500 earnings for the fourth quarter, as of January 6, were expected to decline 4.1% year-over-year, according to FactSet. At the time, we also added that the blended earnings growth rate, which accounts for companies that have reported actual results and estimates for companies that have yet to report, stood at -4.8%.
Today, the blended earnings growth rate stands at... -4.8%.
The recognition that the blended growth rate hasn't deteriorated further might be seen by some as cause for celebration, but knowing that a typical reporting period often sees the final earnings growth rate come in two to four percentage points higher than the estimate at the start of the reporting period, we can call this reporting period a disappointment so far.
That isn't a genuine surprise to us. What is a genuine surprise to us are the forecasts for earnings growth in the second half of the year that are accented with a hockey-stick like ramp for the fourth quarter.
Surprise! Surprise! Surprise!
Frankly, we have been surprised by a lot to begin the year.
- The stock market has done far better than we expected.
- The economy, so far, is holding up better than we thought.
- China ended its zero-COVID policy.
- Natural gas prices have collapsed.
- The lowest-quality stocks, generally speaking, have shown the biggest gains.
- Growth stocks have vastly outperformed value stocks.
- The stock market has been convincing itself that the Fed will cut rates before the end of the year.
We come back to earnings estimates, however, because they are the basis for why we are surprised the stock market has done so well. The gist of the matter is that stock prices have rallied while earnings estimates have been cut.
As of this writing, the S&P 500 is up 6.2% for the year. It had been up as much as 9.3% at its high on February 2 (i.e., the day before the much stronger than expected January employment report). Since the start of the year, the forward twelve-month earnings estimate has dropped from $229.38 to $225.62, according to FactSet.
We would be remiss not to add that the forward twelve-month earnings estimate has increased from $225.37 on February 3 (i.e. the day of the much stronger than expected January employment report) to $225.62. That welcome turn has coincided with some generally pleasing earnings reports and economic data that have bolstered expectations for a soft landing -- or what some proclaim as "no landing" -- for the economy.
On a related note, the Atlanta Fed's GDPNow initial Q1 real GDP forecast provided on January 27 was 0.7%. It went to 2.1% after the employment report, and following this week's data it now stands at 2.5%. That is a long way from a recession.
It's a Second Half Thing
If there is going to be a recession, a growing number of economists now think it will unfold in the second half of 2023. The following assumptions are contributing to that view:
- The long and variable lags of the Fed's rate hikes (and rate hikes by other central banks) will start to be felt more acutely in the second half of the year.
- Consumer spending will weaken with rising unemployment and the resumption of student loan payments.
- Repayment burdens for variable rate debt will command a larger share of disposable income due to continued rate hikes by the Fed.
- Personal savings, as a percentage of disposable personal income, are at depressed levels, which will detract from spending potential as concerns about job security/job losses increase.
These are reasonable assumptions in the face of a Federal Reserve that sounds adamant about continuing to raise rates and keeping rates at higher levels for longer to ensure inflation comes back down to its 2.0% target and stays there.
At the moment, though, the consensus EPS growth estimates for the second half of the year are not in sync with views that the economy will be in recession in the second half of the year.
According to FactSet, analysts expected S&P 500 earnings to be up 3.3% in third quarter and up 9.7% in the fourth quarter. The expected ramp in the fourth quarter is typical -- not from a seasonal standpoint but from a forecasting standpoint. The outlook is always brighter 6-12 months down the road.
Granted this fourth quarter reporting period is providing an easier comparison, but frankly, the U.S. economy has yet to show any real fractures because the labor market has remained as strong as it has. The Fed, of course, sees a weaker labor market as a solution to its inflation problem, meaning it is apt to keep tightening the policy screws until it is confident the labor market has loosened adequately enough to keep inflation under control.
With a 3.4% unemployment rate, there is a lot of loosening ground that still needs to be traveled.
What It All Means
Maybe, then, the earnings forecasts for the first half of 2023 are too pessimistic.
Analysts currently expect first quarter earnings to decline 5.4% and second quarter earnings to decline 3.4%. It is still a big leap, though, to get to earnings growth in either period, knowing that earnings were up 9.5% in the first quarter of 2022 and up 6.2% in the second quarter.
It is a bigger leap in our estimation, however, to deliver on the type of earnings growth projected for the second half of 2023 when the weight of the Fed's rate hikes should be pressing more on economic activity.
To be fair, analysts aren't accounting for much earnings growth overall in 2023. The current estimate, according to FactSet, projects just 2.3% growth over 2022, which is down from 5.0% at the start of the year.
That forecast incorporates a hockey-stick like ramp in the fourth quarter growth estimate, which is ambitious indeed for an economy that should be weakening, not strengthening, in the months ahead. The degree to which it weakens is the great unknown, but under the Fed's watch, weaken it will.
Although the forward twelve-month estimate has come up a bit in recent weeks, we remain unconvinced that the earnings estimate trend has bottomed because it is abundantly clear that the Fed's rate hikes haven't topped and won't roll over soon when they do, barring some shock to the economy that would be even worse for earnings prospects.
-- Patrick J. O'Hare, Briefing.com
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