The stock market’s poor performance in 2022 was largely due to concerns over the Federal Reserve raising interest rates and their potential impact on earnings growth. As we head into the fourth quarter earnings reporting period, analysts have lowered their estimates for earnings growth in 2023 and market participants will be paying close attention to the guidance provided by companies. Banks will set the tone for market understanding of economic conditions and the market will be watching for the degree of confidence companies have in their projections for full-year guidance. Overall, earnings estimate for 2023 have been lowered from $250 to $228.28, representing a 4.9% increase over the 2022 estimate, which has also come down. Investors should pay close attention to how companies handle the potential slow-down in growth and adjust their portfolios accordingly. With the Federal Reserve continuing to raise rates and with corporations facing increased scrutiny over their finances, it is more important than ever for investors to stay informed of the latest developments in order to ensure they are positioned properly.
In addition, the market is also watching closely for any indication of a possible recession and how companies might respond. In the wake of the pandemic, many companies have been forced to adjust their operating models, cutting costs or reducing headcounts in order to stay afloat. While this is necessary for some firms, it could lead to further economic contraction if too many companies react in a similar manner.
Investors need to be prepared for a potential downturn and adjust their portfolios accordingly. This means looking at defensive investments such as bonds, gold, real estate, or even cash equivalents like Treasury bills. It also means considering investments that may continue to perform well in an environment of rising rates and inflation, such as commodities, select stocks, and sectors like Healthcare or Technology. Lastly, investors should consider shorting stocks that may be particularly vulnerable to recessionary pressures.
Overall, the key is to be prepared for the eventual downturn by having a well-rounded portfolio with defensive investments and those that are positioned to benefit from rising inflation. By taking these steps, investors can protect their portfolios and come out of the economic downturn stronger than they went in.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Thursday
The GDP likely grew 2.5% in the 4th quarter, after growing at 3.2% in the 3rd quarter. This slowdown is likely due to a decline in investment, particularly in non-residential and residential spending, due to tighter financial conditions caused by the Federal Reserve’s interest rate hikes. However, factors such as a strong labor market, elevated household spending, and lower energy prices have contributed to a longer economic recovery. This momentum is expected to slow down in the 1st quarter as the effects of tighter monetary policy and financial conditions begin to affect other areas of the economy, including consumer spending.
Friday
New home sales are expected to decrease to 610,000 in December, a decline from 640,000 in the previous month. The high cost of mortgage rates and home prices are still deterring potential buyers, despite some easing. The year-over-year median price growth of new homes has decreased slightly in November, but still remains at 9.5%.
Personal income and outlays are estimated to have increased by 0.2% in December, as job and wage growth slowed from their previous rapid pace. Spending is forecasted to be flat, with a decline in retail sales ex-autos and unit motor vehicle sales offset by solid spending growth in services. Real spending is also expected to be flat, resulting in an increase in the saving rate to 2.6%. Inflation is forecasted to be 0% for headline PCE and 0.3% for core PCE, with the year-over-year rate falling from 5.5% to 5.0% and 4.7% to 4.4% respectively.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 22Q4 Y/Y earnings are expected to be -2.9%. Excluding the energy sector, the Y/Y earnings estimate is -7.3%.
- Of the 55 companies in the S&P 500 that have reported earnings to date for 22Q4, 63.6% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 75.5%.
- During the week of Jan. 23, 88 S&P 500 companies are expected to report quarterly earnings.
Tt’s important to keep track of the latest earnings reports and estimates for the companies in the S&P 500. One key metric to pay attention to is the year-over-year (Y/Y) earnings estimate, which compares a company’s earnings from one year to the next.
According to aggregate estimates, the Y/Y earnings for 22Q4 are expected to be -2.9%. However, when excluding the energy sector, the Y/Y earnings estimate drops even further to -7.3%. This suggests that the energy sector is currently performing better than the rest of the S&P 500.
Another metric to pay attention to is the percentage of companies that have reported earnings above analyst estimates. Of the 55 companies in the S&P 500 that have reported earnings to date for 22Q4, 63.6% have reported earnings above analyst estimates. This is lower than the long-term average of 66.3% and the prior four quarter average of 75.5%.
During the week of January 23rd, 88 S&P 500 companies are expected to report their quarterly earnings. These upcoming reports will provide more insight into the overall performance of the S&P 500 and how it compares to analyst estimates.
It’s worth noting that these figures are subject to change as more companies report their earnings, and that it is important to take into consideration other indicators as well as the overall economic and market conditions. As a CNBC contributor, it is essential to provide context and analysis to these numbers to give a comprehensive picture of the state of the market.
Macro Market
I wanted to share my insights on the current state of the economy and what we can expect in the coming months.
Firstly, it’s important to note that the recent slowdown in manufacturing output has accelerated and December retail sales have underwhelmed, indicating that economic momentum is continuing to ebb. Despite this, I believe that there is still enough momentum in consumer spending to push the start of a mild recession into the second quarter of the year, as opposed to the first quarter as previously expected.
One factor that may contribute to this potential delay in the onset of a recession is the steady rate of consumer spending, which has remained relatively stable despite the overall slowing of economic activity. This may be due to a number of factors, such as low unemployment rates and strong consumer confidence.
I also expect to see a 25-basis point rate hike in February, as the Federal Reserve looks to take a more cautious approach to monetary policy in light of the recent economic data. However, it is worth noting that moderating activity and inflation could lead the Fed to pause in March, as they closely monitor economic conditions and adjust their policy accordingly.
Despite the potential for a mild recession in the near future, it’s important to note that the overall economic outlook is still relatively positive. The U.S. economy has been in a state of expansion for over a decade, and while growth may be slowing, it is not expected to fall into a full-blown recession in the immediate future.
Iit’s important to keep in mind that the Federal Reserve has a number of tools at its disposal to help mitigate the effects of a recession, such as lowering interest rates and implementing quantitative easing. Additionally, fiscal policy, such as government spending and tax cuts, can also play a role in supporting the economy during a downturn.
While the recent economic data may be cause for some concern, it’s important to remember that the economy is constantly in a state of flux and that there are a number of factors that can impact its trajectory. As such, it’s important to stay informed and to be prepared for any eventualities.
Global Spotlight
The European Union (EU) is set to discuss new sanctions on Iran at a meeting of foreign ministers on January 23rd, targeting the Islamic Revolutionary Guard Corps. Iran may retaliate by listing EU military services as terrorist entities. The EU and member states have recently imposed new sanctions on Iran due to crackdowns on anti-government protests, with the European Parliament calling for more sanctions on individuals and entities responsible for human rights violations and the designation of the IRGC as a terrorist entity. This deterioration in diplomatic ties will make it more difficult for Iran to negotiate on economic and security issues.
Brazilian President Luiz Inacio Lula da Silva and Argentine President Alberto Fernandez will meet on January 23rd in Buenos Aires to discuss bilateral relations. The meeting is a reflection of the closer diplomatic relations between the two countries due to their shared left-wing ideology and pursue greater integration and common ground on issues concerning trade bloc Mercosur. While the discussions are expected to strengthen personal ties between the leaders, it is unlikely to lead to further trade integration, and both countries are likely to retain protectionist trade policies.
Italian Prime Minister Giorgia Meloni is visiting Algiers on Jan 22-23 to increase natural gas imports from Algeria in order to strengthen Italy’s energy security and decrease its dependence on Russian gas following the invasion of Ukraine. Meloni will be accompanied by a large delegation and is expected to sign bilateral agreements with the Algerian government, particularly in the area of energy. In 2022, Algerian gas accounted for 34.3% of Italy’s total demand, and this figure is expected to increase to 38% in 2023, allowing Italy to make it through the 2023-24 winter without disruptions. The visit highlights the importance of energy security in the new Italian government’s foreign policy priorities, particularly in the Mediterranean where Italy aims to increase its influence.
China is celebrating the Lunar New Year from January 21st-27th, causing a slowdown in public and private services and industries. Millions of Chinese people will visit family, especially outside major cities. The return period from the holiday will indicate the recovery of tourism and domestic consumption. There may also be another wave of COVID-19 infections, with a projection of China’s COVID-19 deaths peaking at around 36,000 per day by January 26th.
Stratfor.com
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