Market Snapshot
briefing.com
| Dow | 34177.80 | +204.86 | (0.60%) | | Nasdaq | 10991.12 | +59.53 | (0.54%) | | SP 500 | 3983.93 | +14.32 | (0.36%) | | 10-yr Note | +29/32 | 3.45 |
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| | NYSE | Adv 2305 | Dec 708 | Vol 870 mln | | Nasdaq | Adv 3257 | Dec 1315 | Vol 5.5 bln |
Industry Watch
| Strong: Energy, Communication Services, Information Technology, Real Estate, Industrials |
| | Weak: Health Care, Consumer Staples, Utilities |
Moving the Market
-- S&P 500 pushing past its 200-day moving average at 3,984
-- Digesting the December Consumer Price Index (CPI), which showed that services inflation did not improve
-- Directional leadership from mega cap stocks
-- Worries about the Fed's rate hike path on the heels of the CPI report and weekly jobs report
-- Falling Treasury yields
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Closing Summary
12-Jan-23 16:25 ET
Dow +216.96 at 34189.90, Nasdaq +69.43 at 11001.02, S&P +13.56 at 3983.17
[BRIEFING.COM] The stock market opened to mixed action on the heels of the December Consumer Price Index (CPI). The major indices oscillated around their flat lines after the CPI report showed continued disinflation in total CPI (from 7.1% year/year to 6.5%) and core CPI (from 6.0% year/year to 5.7%).
Those were pleasing headline numbers for a market that has been trading with the belief that the Fed may be able to stop raising rates sooner than previously thought. The key takeaway from the report, though, was that that services inflation, which the Fed watches closely, did not improve and rose to 7.5% year/year from 7.2% in November.
The latter point did not seem to hold back the stock or bond market today with price action in both markets indicating investors still believe the Fed will pause its rate hikes sooner rather than later. In fact, the fed funds futures market now prices in a 66.4% probability of the target range for the fed funds rate peaking at 4.75-5.00% in May versus a 42.3% a week ago, according to the CME FedWatch Tool.
The 2-yr Treasury note yield, which is most sensitive to changes in the fed funds rate, initially spiked to 4.30% after the CPI report before plunging to 4.11%. Ultimately, it settled the session down 11 basis points to 4.13%. The 10-yr note yield fell 11 basis points to 3.45%.
Also, St. Louis Fed President Bullard (non-FOMC voter) said that he thinks the Fed should get rates above 5.0% quickly and hold them there, but again, market participants took that view in stride.
The positive price action in the stock was particularly notable considering the big move leading up to the CPI report. The S&P 500 was up 3.7% for the year entering today and up 4.4% from its low of 3,802 on January 5. Today, the S&P 500 spent a good portion of the session above its 200-day moving average at 3,984, helped by some modest gains in the mega cap stocks, before closing just a whisker shy of that key technical level.
Most of the 11 S&P 500 sectors logged a gain today led by energy (+1.9%) and real estate (+1.1%). The heavily weighted communication services (+0.8%) and information technology (+0.7%) sectors were also among the top performers. Meanwhile, the countercyclical consumer staples (-0.8%), utilities (-0.6%), and health care (-0.4%) sectors were alone in negative territory.
- Russell 2000: +6.5% YTD
- S&P Midcap 400: +5.7% YTD
- Nasdaq Composite: +5.1% YTD
- S&P 500: +3.7% YTD
- Dow Jones Industrial Average: +3.2% YTD
Reviewing today's economic data:
- December CPI -0.1% (Briefing.com consensus 0.0%); Prior 0.1%; December Core CPI 0.3% (Briefing.com consensus 0.3%); Prior 0.2%
- The key takeaway from the report, however, is that services inflation, which the Fed is keeping a close watch on, did not improve. On a year-over-year basis, services inflation was up 7.5% versus 7.2% in November. Excluding rent of shelter, services inflation increased 7.4% year-over-year versus 7.3% in November. Excluding medical care services, services inflation was up 8.0% year-over-year versus 7.6% in November.
- Weekly Initial Claims 205K (Briefing.com consensus 210K); Prior was revised to 206K from 204K; Weekly Continuing Claims 1.634 mln; Prior was revised to 1.697 mln from 1.694 mln
- The key takeaway from this report is no different than last week: the low level of initial claims -- a leading indicator -- is a telltale sign of a tight labor market that is going to keep the Fed on edge about wage inflation keeping overall inflation well above the Fed's 2.0% target.\
- Weekly EIA Natural Gas Inventories showed a build of 11 bcf versus a draw of 221 bcf last week.
Ahead of tomorrow's open, UnitedHealth (UNH), JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Delta Air Lines (DAL), BlackRock (BLK), BNY Mellon (BK), and First Republic Bank (FRC) will report quarterly results.
Economic data releases tomorrow include:
- 8:30 ET: December Import Prices (prior -0.6%), Import Prices ex-oil (prior -0.4%), Export Prices (prior -0.3%), and Export Prices ex-agriculture (prior -0.6%)
- 10:00 ET: Preliminary University of Michigan Consumer Sentiment Index (Briefing.com consensus 60.5; prior 59.7)
Market maintains position heading into the close
12-Jan-23 15:30 ET
Dow +194.65 at 34167.59, Nasdaq +60.32 at 10991.91, S&P +12.59 at 3982.20
[BRIEFING.COM] Things are little changed heading into the close.
Ahead of tomorrow's open, UnitedHealth (UNH), JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Delta Air Lines (DAL), BlackRock (BLK), BNY Mellon (BK), and First Republic Bank (FRC) will report quarterly results.
Looking ahead to Friday, market participants will receive the following economic data:
- 8:30 ET: December Import Prices (prior -0.6%), Import Prices ex-oil (prior -0.4%), Export Prices (prior -0.3%), and Export Prices ex-agriculture (prior -0.6%)
- 10:00 ET: Preliminary University of Michigan Consumer Sentiment Index (Briefing.com consensus 60.5; prior 59.7)
Financial stocks trade in mixed fashion ahead of earnings reports
12-Jan-23 14:55 ET
Dow +204.86 at 34177.80, Nasdaq +59.53 at 10991.12, S&P +14.32 at 3983.93
[BRIEFING.COM] The Dow Jones Industrial Average leads its peers with a 0.8% gain, followed by the Nasdaq (+0.7%) then S&P 500 (+0.6%).
The S&P 500 financials sector trades near the middle of the pack for the 11 sectors. Components JPMorgan Chase (JPM 140.44, +0.81, +1.0%), Bank of America (BAC 34.66, +0.28, +0.8%), Wells Fargo (WFC 43.19, +0.45, +1.1%), Citigroup (C 49.28, +0.56, +1.1%), BlackRock (BLK 753.11, -2.81, -0.4%), BNY Mellon (BK 48.32, +0.12, +0.3%), and First Republic Bank (FRC 127.37, -0.62, -0.5%) are all set to report earnings ahead of tomorrow's open, setting the tone for the next few weeks.
Energy complex futures settled the session higher. WTI crude oil futures rose 0.9% to $78.35/bbl and natural gas futures rose 0.3% to $3.37/mmbtu.
NFLX and BUD making sizable moves on analyst calls
12-Jan-23 14:35 ET
Dow +243.65 at 34216.59, Nasdaq +68.66 at 11000.25, S&P +20.09 at 3989.70
[BRIEFING.COM] Things are little changed in the last half hour. The main indices are sticking to a narrow range near session highs.
Netflix (NLFX 330.74, +3.48, +1.1%) and Anheuser-Busch InBev (BUD 60.75, -1.13, -1.8%) are making sizable moves in opposite directions following analyst calls. The former was upgraded to Buy from Hold at Jefferies while the latter was downgraded to Sell from Neutral at UBS.
Gains in Netflix help to boost the communication services (+1.1%) sector towards the top of the leaderboard for the 11 sectors. Alphabet (GOOG 92.19, -0.10, -0.1%), meanwhile, sports a slim loss.
Market recovers from quick dip lower
12-Jan-23 13:55 ET
Dow +299.19 at 34272.13, Nasdaq +89.67 at 11021.26, S&P +26.05 at 3995.66
[BRIEFING.COM] The main indices returned to their best levels of the session following a quick dip lower recently.
At the same time, Treasury yields continue to decline. The 2-yr note yield is down 11 basis points to 4.12% and the 10-yr note yield is down 11 basis points to 3.44%.
Gold futures rose $20.10 (+1.1%) to $1,899.20/oz and copper futures rose $0.01 (+0.1%) to $4.19/lb.
The U.S. Dollar Index continues to lose ground, down 1.0% to 102.16.
Page One
Last Updated: 12-Jan-23 09:04 ET | Archive
No fear of CPI or the Fed it seems
Objectively, it is fair to say that the stock and bond markets have not been living in fear of what they might see in the December Consumer Price Index (CPI), which was released this morning.
Coming into today, the S&P 500 is up 3.7% year-to-date and the 10-yr note yield was down 33 basis points from the start of the year. Moreover, yesterday's $32 billion 10-yr Treasury note reopening saw strong demand.
For good measure, the U.S. Dollar Index was down 0.5% in 2023 and the fed funds futures market had priced in a 77.3% probability of a 25 basis point rate hike at the February FOMC meeting versus 62.6% a week ago and 35.1% a month ago, according to the CME FedWatch Tool.
For better measure, the S&P 500 futures were 0.4% above fair value just before the CPI release today, the 10-yr note yield was down another five basis points to 3.50%, and the U.S. Dollar Index was down another 0.2% to 102.96.
The only thing the capital markets had to fear, it seems, was fear itself -- and how the Fed might view the December CPI data.
From a headline standpoint, the Consumer Price Index was pretty much on the mark with the market's hopeful expectations. Total CPI declined 0.1% month-over-month (Briefing.com consensus 0.0%), paced by a 9.4% m/m decline in the gasoline index, while core CPI, which excludes food and energy, increased 0.3% month-over-month as expected.
On a year-over-year basis, total CPI was up 6.5% -- the smallest increase since October 2021 -- versus 7.1% in November. Core CPI was up 5.7% versus 6.0% in November.
The key takeaway from the report, however, is that services inflation, which the Fed is keeping a close watch on, did not improve. On a year-over-year basis, services inflation was up 7.5% versus 7.2% in November. Excluding rent of shelter, services inflation increased 7.4% year-over-year versus 7.3% in November. Excluding medical care services, services inflation was up 8.0% year-over-year versus 7.6% in November.
In brief, then, the market will have to continue to fear that the Fed isn't going to see things the way the market thinks the Fed should see things. The Fed won't like the sticky services inflation data in this report, so it will have a mind to keep raising rates and will continue to scoff at the notion of a rate cut happening in 2023.
The latest weekly initial claims report will seemingly support that thinking, too.
Initial jobless claims for the week ending January 7 decreased by 1,000 to 205,000 (Briefing.com consensus 210,000). Continuing jobless claims for the week ending December 31 decreased by 63,000 to 1.634 million.
The key takeaway from this report is no different than last week: the low level of initial claims -- a leading indicator -- is a telltale sign of a tight labor market that is going to keep the Fed on edge about wage inflation keeping overall inflation well above the Fed's 2.0% target.
Trading has been volatile in the wake of this morning's data, although the market has managed to hold its ground for the most part and even improve slightly from what was seen prior to the data releases.
The S&P 500 futures are up 17 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 55 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 124 points and are trading 0.4% above fair value. The 10-yr note yield, which spiked to 3.56% in the wake of the data, is back down to 3.47%. The U.S. Dollar Index is down 0.6% to 102.59.
There is no fear, though, in these current standings, as it appears the capital markets continue to stand on the belief that they will be right and that the Fed will hit the pause button sooner rather than later.
-- Patrick J. O'Hare, Briefing.com
Disney faces another drama as activist investor looks to gain access to the Magic Kingdom (DIS)
Following a tumultuous year that saw its stock fall by 45%, Disney (DIS) is off to a magical start in 2023 with shares soaring higher by over 15% to start the year. The stock's revival is picking up steam today after Trian Fund Management's Nelson Peltz filed a proxy statement to gain a spot on DIS's Board of Directors. The development is sparking some optimism that Peltz, who acquired about $900 mln in DIS shares through his hedge fund, can steer the company towards improved profitability if he wins a seat at the table. This would primarily be achieved through cost-cutting actions and enhanced operational efficiency.
- Peltz's move also adds another chapter to the unfolding drama revolving around the return of Bob Iger to the CEO role last November. Recall that Iger replaced Bob Chapek in a stunning turn of events that caught many DIS employees and investors off-guard.
- Mounting losses for DIS's streaming services, including Disney+, were cited as a primary reason for Chapek's departure. With the Direct-to-Consumer segment seeing its operating loss more than doubling on a yr/yr basis to ($1.5) bln in 4Q22, there is certainly some validity to that assertion.
However, Peltz was not in favor of the CEO transition, believing that Chapek still had DIS on the right track despite the recent earnings disappointments. In fact, Peltz took it a step further by criticizing some of Iger's moves during his previous stint as CEO, such as the amount that DIS paid to acquire the assets of 21st Century Fox. Unsurprisingly, DIS's Board of Directions disagrees with Peltz's stance and is asking shareholders to vote against allowing him on the board at its annual shareholder meeting.
- Not coincidentally, DIS also announced last night that Mark Parker, Nike's (NKE) executive chairman and a current DIS board member, will replace Susan Arnold as Chair of the Board.
- The move is seen as a way to stave off Peltz's boardroom ambitions and his influence as Parker supported DIS's shake-up at the top.
As this plays out, the bottom line is that DIS is still at a crossroads as it looks to balance an unprofitable streaming business that's growing quickly, with a profitable theme park business that could face a tough year due to macroeconomic headwinds. On that note, DIS just lowered theme park ticket prices for certain days and offered other discounts in an effort to bolster demand. Perhaps the biggest challenge for Iger, though, will be finding the right balance between content spending and profitability in an ultra-competitive streaming space. With Peltz now standing at DIS's gates, investors are betting that improving the bottom line will become a main focal point if he's allowed entrance into the Magic Kingdom.
Best Buy is making the right moves to keep its shares trending in a positive direction (BBY)
Best Buy (BBY) shares are hugging their flatline today, even after catching a downgrade at Exane BNP Paribas. This is the second downgrade we have covered in just the past month, signaling that even if holiday spending was robust, BBY might be staring at numerous obstacles in 2023.
Briefing.com notes that shares of BBY are currently struggling to break free from resistance levels around $86-87, where they have pulled back from three times over the past seven months. However, the worst may already be in the rear-view mirror for BBY, setting the stage for considerable upside, especially if the company registers a strong holiday season.
- Early data shows that holiday retail sales were decent, growing relatively in-line with recent inflation rates. For example, Mastercard (MA) noted that U.S. retail sales climbed 7.6% during the holiday season.
- BBY's better-than-expected OctQ earnings report was already an encouraging sign for the holiday season, which the company anticipated to resemble historical shopping patterns.
- Investors applauded BBY's offer of free shipping on all orders, without minimums, earlier this week. BBY's move is placing rivals Amazon (AMZN) and Walmart (WMT) in its crosshairs, as it offers this perk without a monthly or annual fee. Meanwhile, AMZN increased its annual Prime membership fee to $139 from $119 last year, while WMT charges $98 to enjoy a similar benefit.
- BBY's online sales as a percentage of domestic revs were 31% through the first nine months of 2022, twice as high as pre-pandemic rates. BBY's online presence should grow even stronger by adding free shipping, even as in-person shopping rebounds, allowing it to capture share from e-commerce competitors.
- Adjusted operating margins contracted in OctQ due to increased promotional activity. BBY has also been investing in certain initiatives, including Totaltech, Best Buy Health, and store remodels, which have weighed on margins. However, even though heightened promotional activity may persist throughout 2023, BBY's investments should improve profitability over the long haul. Additionally, BBY can drastically reduce shipping times while cutting down on costs by shipping from its locations.
Overall, even though shares of BBY are trading relatively stagnant on the day, the company is making the right moves to be a worthy adversary within the retail and e-commerce landscape, potentially paving the way for significant upside. Further, valuations remain attractive at around 13x forward earnings. BBY has also been aggressive in returning capital to shareholders through a 4.1% dividend yield and its share repurchase program, which resumed in early November.
American Airlines taking airline stocks under its wing after sharply raising guidance (AAL)
The past few weeks have been very turbulent for the airline industry, especially for Southwest Air (LUV), as a sprawling winter storm was followed by a major glitch in a key FAA system that grounded thousands of flights. However, despite all the disruptions and headaches for travelers, airline stocks have been flying higher to start 2023, reflected by a 16% year-to-date gain for the U.S. Global Jets ETF (JETS). This morning, American Airlines (AAL) put a charge into that upward momentum when it significantly raised its Q4 EPS and revenue guidance.
- For the quarter, AAL is now forecasting EPS of $1.12-$1.17 and revenue growth of 16-17%, compared to its prior guidance of $0.50-$0.70 and growth of 11-13%.
- The company's strong outlook sets the table for what should be a solid Q4 earnings season for airlines.
- On that note, Delta Air Lines (DAL) will kick off earnings for the group before the open tomorrow morning. About one month ago, DAL provided its own bullish outlook, raising its Q4 EPS guidance to $1.35-$1.40 from $1.00-$1.25, while issuing upside EPS guidance of $5.00-$6.00 for FY23.
- Based on AAL's upwardly revised outlook, it's evident that travel demand for the holiday season was robust for the company and its peers. With that in mind, it wouldn't be overly surprising if DAL surpasses its recently updated Q4 forecast tomorrow.
Demand for leisure travel has been very healthy for nearly two years now.
- A lasting trend to emerge from the pandemic is that people are valuing experiences more, which is creating a shift in consumer spending patterns.
- Corporate travel has been slower to recover, but that business is also on the upswing and is approaching 2019 levels across the industry. In Q3, both AAL and DAL reported that corporate sales recovered to 80% of pre-pandemic levels.
While demand has been resiliently strong in the face of high inflation and rising interest rates, reduced capacity and an accompanying increase in cost per available seat mile (CASM) have weighed on the group.
- In particular, airlines and airports have struggled to hire and retain enough employees to meet the surge in demand for travel. Consequently, carriers have been forced to cut flights, which means there's fewer seats to spread its costs across.
- Like many other metrics, capacity is moving in the right direction. AAL disclosed that Q4 capacity was down by 6.1% versus 4Q19, marking an improvement from the 9.6% decrease experienced in 3Q22.
- During AAL's Q3 earnings call, CFO Derek Kerr stated that the capacity constraints that afflicted the company in 2022 (pilot/worker shortages, slower aircraft deliveries) should slow in 2023. Therefore, he forecasted that 2023 capacity will be between 95-100% of 2019 levels.
Aside from the profound troubles experienced over the past few weeks, the narrative surrounding the airline space continues to brighten as AAL's strong guidance emphatically highlights the building momentum for the group.
KB Home's NovQ results not exactly raising the roof; still, shares are holding up (KBH)
KB Home (KBH -3%) is slipping today on disappointing Q4 (Nov) results. The homebuilder missed analyst earnings and revenue forecasts in the quarter while also coming up just short of its housing revenue target for the first time since 1Q22 (Feb). Furthermore, net orders crumbled by 80% yr/yr to 692 as cancellations continued to climb.
Nevertheless, shares of KBH are holding up quite well despite these blemishes. We saw similar action with peer Lennar (LEN), which quickly rebounded following underwhelming NovQ earnings results in mid-December. We think a factor in KBH holding up nicely is that investors are no longer shocked by lackluster quarterly numbers. The abundance of challenges weighing on homebuilders, including rising mortgage rates, elevated inflation, and weak overall consumer demand, has been well documented. Additionally, KBH trades at a reasonable valuation at around 4x forward earnings.
Also, KBH's negative headline figures appear less grim when drilling deeper.
- The plunge in net orders was primarily due to KBH prioritizing delivering on its backlog, protecting margins instead of pursuing incremental sales during a softer demand quarter. If KBH had elected to discount pricing to spur sales, it estimated an adverse impact on its backlog value in the hundreds of millions of dollars. As a result, KBH's operating margins expanded 290 bps yr/yr to 15.8%.
- Cancellations did tick up to 14% from the 9% posted in Q3 (Aug). However, KBH's cancellation rate remained slightly below its historical mid-teens average. Given the flood of obstacles plaguing the homebuilding industry, investors are likely not too surprised to find KBH's cancellation rate increase sequentially.
- KBH also noted that the main reason behind the uptick was an ongoing lack of confidence from buyers even though they qualify for their home purchases, with many locked on their loans. That is important to note since it underscores that demand is still present and buyers are still qualifying.
- KBH's outlook is not too bullish. The company is guiding to FY23 housing revenue of $5.0-6.0 bln, a 20% decline yr/yr at the midpoint. KBH is also targeting net orders to be down 50-60% yr/yr. Still, KBH remains optimistic about the housing market's long-term outlook due to favorable demographic trends and ongoing underproduction of new homes.
Bottom line, KBH's Q4 results did not exactly shine. However, given the unfavorable market conditions, investors are approaching the stock with a reasonably forgiving attitude. Shares are still slightly up on the week, maintaining a healthy distance from their 20-day moving average of around $33.00. Still, the Fed has yet to signal that it will pause its rate hike campaign, keeping mortgage rates decade highs. Therefore, although long-term dynamics remain positive, the near-term remains uncertain.
Logitech scrolls sharply lower following weak DecQ guidance; slowdown on enterprise side (LOGI)
Logitech (LOGI -17%) is scrolling sharply lower today after this supplier of PC and gaming peripherals (keyboards, mice, webcams, trackballs) provided downside guidance for Q3 (Dec). The company expects revenue of just $1.26-1.27 bln, which was a good bit below analyst expectations. LOGI also lowered its full year outlook. The company cites challenging macro conditions, including a slowdown in sales to enterprise customers and uncertainty in supply availability.
So why is the stock down so sharply?
- The stock has been booming since late October when LOGI reported SepQ results with big EPS upside and reaffirmed FY23 guidance. Given the PC downturn, investors were surprised to see such a strong quarter and they probably let their guard down, thinking maybe LOGI is weathering the downturn better than expected. We think that report may have lulled investors into a false sense of security. So this guidance was a bit of shock.
- It is not surprising that LOGI would see sales decline because it is lapping huge home office sales during the pandemic, but a 22-23% (17-18% CC) revenue decline is pretty significant. A slight miss probably would have been ignored by investors. The business seems to have taken a turn lower in DecQ.
- The lower sales will also pressure margins as LOGI now expects DecQ adjusted operating margin of just 15.7-16.0% vs 18.5% a year ago.
- PC-related products remain a big part of LOGI's business, but in recent years, LOGI has expanded into video collaboration, tablets, gaming headsets, mobile speakers, wearables and smart home devices. We think that diversification is great to see and was a bright spot in SepQ. For example, video conference room cameras and peripherals grew nearly 30% in SepQ. Today, LOGI is citing a slowdown on the enterprise side. That makes us think maybe the consumer held up as expected, but now the enterprise segment is weakening.
Overall, the big drop in the stock seems to be driven by expectations running too high following a good SepQ report in October. LOGI then said at an investor conference in late November that "consumer demand is really good." These results/comments fueled a strong move in the stock in recent months, but investors got a wake up call today. We think this mismatch between high expectations and the actual guidance is causing the big pullback today.
The Big Picture
Last Updated: 12-Jan-23 15:36 ET | Archive
Earnings are the crux of the market matter in 2023
The losses the stock market suffered in 2022 had a lot to do with the Federal Reserve raising interest rates. The thinking was that the higher rates would adversely impact economic growth, and, consequently, earnings growth.
With earnings prospects in question, equity valuations were also called into question and the universal judgment was that stocks were overvalued. That judgment sentenced stocks to a lot of selling pressure -- some more than others -- and led to the stock market's worst performance since 2008.
The initial struggles in 2022 were rooted in the understanding that the Fed's easy monetary policy was ending. In effect, the reality hit home that the party seen in 2021 was over, animal spirits would be killed, and valuations would matter again.
As 2022 progressed, though, the forward-looking stock market wasn't concerned so much with how much earnings growth would slow in 2022 as it was with how much earnings growth would slow in 2023.
With the fourth quarter earnings reporting period unfolding over the next several weeks, we will soon have some answers.
Estimate Cuts
We don't want to say that the fourth quarter results are inconsequential, yet they will take a distant backseat to the guidance that accompanies the fourth quarter reports.
Not all companies issue specific guidance, but with concerns about a possible recession in 2023 running high, qualitative remarks about the demand outlook will resonate as much as any quantitative guidance that is provided.
Overall, S&P 500 earnings were expected as of January 6 to decline 4.1% year-over-year, according to FactSet. The blended growth rate, which accounts for companies that have reported and estimates for companies that have not, currently stands at -4.8%.
We know from FactSet that analysts were slashing their fourth quarter earnings estimates in front of the reporting period. Analysts typically cut their estimates as a quarter progresses, but this year the cuts were larger than usual.
The fourth quarter bottom-up EPS estimate decreased by 6.5% between September 30 and December 31. During the past five years, the average decline in the bottom-up EPS estimate during a quarter has been 2.5%, according to FactSet.
What the market knows going into the reports, then, is that the earnings bar has been lowered quite a bit, making it easier per chance for companies to report better-than-expected fourth quarter results.
Feeling Confident?
The banks will get things going on the earnings reporting front. They don't provide specific EPS or revenue guidance, but they generally have plenty to say about what they are seeing in terms of loan demand, credit quality trends, and general economic conditions.
Market participants will be paying close attention to what the banks are saying about credit quality and what they are accounting for in terms of loan loss reserves relative to their loan base. The banks will set the tone early with respect to the market's understanding of economic conditions before giving way to the industrial, consumer staples, consumer discretionary, and technology companies that typically provide specific EPS and/or revenue guidance.
One issue yet to be settled is how confident companies will be projecting full-year guidance. The degree of confidence, we suppose, will be reflected in the width of guidance ranges.
In any case, we also know from FactSet that earnings estimates for calendar 2023 have been cut from just north of $250.00 in the middle of 2022 to $228.28 today. The latter represents an expected 4.9% increase over the calendar 2022 estimate of $217.73, which has also come down markedly since the middle of 2022.
What It All Means
These estimates are the crux of the market matter as we move into 2023. Currently, the S&P 500 trades at 17.5x calendar 2023 estimates, which can be looked upon at this juncture as forward 12-month estimates. The 10-yr historical average is 17.2.
The inference is that the market is trading at a slight premium to its historical average multiple before the economy is feeling the brunt of the Fed's rate hikes. To that end, the Atlanta Fed GDPNow model estimates Q4 real GDP growth will be 4.1% on an annualized basis.
The downward revision to 2023 earnings estimates, though, reflects an understanding that the long and variable lags of the Fed's rate hikes will take more of a toll as 2023 progresses, particularly since the Fed seems intent on wanting to see more weakness in the labor market.
The deeply inverted yield curve suggests there will be some notable economic weakness in the future, the timing and severity of which remain open for debate. The severity factor ranges from little growth to a mild recession (i.e., a soft landing) to a full-blown recession (i.e., a hard landing).
An environment of little growth would fit within the confines of the current calendar 2023 earnings estimate. In that case, one could say the market is fairly valued at its current level.
If there is a mild recession, earnings would presumably decline 1-10% from 2022, leaving the market somewhat overvalued at its current level.
And if there is a hard landing, earnings would presumably decline more than 10% from 2022, leaving the market decidedly overvalued at its current level.
There is a lot riding on the fourth quarter earnings reporting period. Market participants will start to understand if the cut to 2023 earnings estimates since the middle of 2022 is just right, too much, or not enough.
Regardless, there will be valuation constraints in 2023 because 2022 taught everyone again that valuation matters.
We are not starting 2023 with an earnings multiple that is too high or too low. We are starting just above average in front of an earnings reporting period that is expected to be below average and with an economy that is expected to weaken noticeably, meaning multiple expansion and big gains this year won't be easy to achieve at the index level if the earnings guidance surprises are more negative than positive.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: The next installment of The Big Picture will be published the week of January 23)
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