Despite the appearance of a good week for “the market,” bank stocks are once again under pressure. Mega-cap stocks have been the go-to safety outlets for investors as they have shown resilience in the face of banking issues. However, concerns surrounding the state of the banking industry continue to drive negative sentiment for the broader market. This is evident in the underperformance of cyclical energy, materials, industrials, and financial sectors. The market’s trajectory will likely depend on the performance of mega-cap stocks, which have so far managed to prop up the market despite ongoing challenges in the banking sector.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
🏠 Existing Home Sales: Expecting a rise in existing home sales to 4.10mn saar in February from 4.00mn, with recent data indicating a possible bottom. However, downside risks persist due to increasing mortgage rates and existing home sales remaining -36.9% y/y in January.
📈 FOMC Rates Decision: Anticipating a 25bp rate hike to 4.75-5.0% in the March FOMC meeting, despite recent market turbulence. Policymakers are likely to focus on inflation stability, but forward guidance may be dovish due to emerging downside risks.
📉 Initial Jobless Claims: Forecasting a decrease to 190k in the week ending March 18, with a tight labor market continuing. The 4-week moving average slightly decreased to 196k, and the Fed still has work to do in order to cool labor demand.
🏡 New Home Sales: Expecting a decline to 650k saar in February from 670k, with median prices down for the first time y/y at -0.7%. The tight housing market remains a challenge as mortgage rates are high and supply falls, but it should rebalance over time.
🏭 S&P Global US Manufacturing PMI: Expecting a slight decrease in the preliminary March reading to 47.0 from 47.3, as manufacturing faces challenges from demand rebalancing, higher interest rates, and weaker external demand.
📊 S&P Global US Services PMI: Anticipating a rise in the preliminary March reading to 51.0 from 50.6, marking the second consecutive print above 50. The services sector sees ongoing recovery as demand shifts back from goods.
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
Aggregate Estimates and Revisions
- 22Q4 Y/Y earnings are expected to be -3.2%. Excluding the energy sector, the Y/Y earnings estimate is -7.4%.
- Of the 498 companies in the S&P 500 that have reported earnings to date for 22Q4, 68.1% 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 Mar. 20, five S&P 500 companies are expected to report quarterly earnings.
The 22Q4 year-over-year earnings are expected to be -3.2%. Excluding the energy sector, the estimate drops to -7.4%. So far, 68.1% of the 498 S&P 500 companies that reported 22Q4 earnings have exceeded analyst estimates, compared to a long-term average of 66.3% and a prior four-quarter average of 75.5%. In the week of March 20th, five more S&P 500 companies are expected to report their quarterly earnings.
Source I/B/E/S data from Refinitiv
Macro Market
📉 Growth
I’ve observed that GDP growth slowed down to 0.9% in 2022 (4Q/4Q), and I expect it to further decline to -0.4% in 2023 (4Q/4Q) due to the lagged effects of tighter monetary policy and financial conditions. However, I foresee a recovery by the 4th quarter of 2024.
📊 Inflation
I believe a mild recession this year and ongoing goods deflation will lead to disinflation next year. I’ve noted that headline PCE grew at 5.7% in 2022 (4Q/4Q) and is expected to grow at 3.2% in 2023, while core grew at 4.8% and is expected to come in at 3.3% in 2023. My forecast still puts inflation broadly in line with the Fed’s 2% mandate by the end of 2024.
💰 Federal Reserve
I still expect 25bp hikes in March, May, and June, resulting in a terminal rate of 5.25-5.5%. I maintain my prediction of the first rate cut in March 2024. Recent financial market stress has injected downside risk to my expected policy rate path and economic outlook.
I recommend that investors steer clear of unprofitable growth stocks, even though bond yields have decreased. Valuation-wise, if the economy demonstrates resilience and leads to higher yields, this could create headwinds for the long-duration cash flows of unprofitable growth stocks. I think that Treasury yields have dropped more than necessary compared to my baseline economic growth forecast. On the other hand, if the economy experiences a sharp slowdown, justifying the current rate market pricing, investors may shift their focus from unprofitable stocks towards perceived “quality” stocks, including those with high margins and high returns on capital. Unprofitable growth stocks with high cash burn rates could face the challenge of raising capital in difficult financing conditions.
Global Spotlight
Nigeria is set to hold gubernatorial elections on March 18, with voters in 28 of the country’s 36 states heading to the polls. The National Electoral Commission postponed the elections by a week due to logistical challenges with electronic voting machines. The outcome of the elections will be crucial as governors have considerable political power through resource distribution and political appointments. The elections are likely to be highly contested in the Federal Capital Territory and Lagos, which the opposition Labour Party won during the presidential elections in February 2023.
Japanese Prime Minister Fumio Kishida is scheduled to visit India from March 20-21 to participate in an annual bilateral summit. Kishida will unveil Japan’s new strategy for a free and open Indo-Pacific during the visit. The two countries share a strong bilateral relationship, and their common interest in countering Chinese expansionism has brought them closer together. This visit comes at a critical time for India’s G-20 presidency, with the ongoing conflict in Ukraine complicating attempts to build consensus. While India may not be enthusiastic about joining a broader containment effort against China in the Indo-Pacific, it is likely to be receptive to Japanese efforts to strengthen trade cooperation.
Chinese President Xi Jinping is expected to visit Russia on March 20 for a three-day trip to meet with President Vladimir Putin and other senior officials. The two leaders are likely to discuss the war in Ukraine, military-technical cooperation, and energy cooperation, and will sign statements on deeper economic cooperation. The visit comes just days after Xi’s reelection to a third presidential term, underscoring the importance of relations with Russia for China. Moscow, for its part, is likely to emphasize its close and deepening ties with Beijing to deter Western pressure and support for Ukraine. Meanwhile, Beijing is likely to use the visit to build international support and undermine Western unity on the issue of support for Ukraine.
The UK’s House of Commons is set to debate and vote on the Stormont brake to the Windsor Framework between the UK and the EU on March 22. The brake gives Northern Ireland’s lawmakers veto powers over changes to EU rules. While it is unclear whether Northern Ireland’s Democratic Unionist Party or the influential pro-Brexit European Research Group will back Prime Minister Rishi Sunak’s deal with Brussels, the opposition Labour Party has pledged its support, making it likely that the deal will pass. Nevertheless, Sunak will work to prevent a rebellion that could undermine his leadership.
Stratfor.com
If you find this post helpful, please pass along to the investment community. If you would like to see any additional information, drop us a line and let us know.
