The first quarter of 2023 (23Q1) is showing signs of financial strain, as year-over-year earnings are anticipated to decline by 4.7%. This trend is particularly concerning when considering that the drop deepens to 6.1% when excluding the energy sector. Despite these downward trends, there remains a silver lining: 76.1% of the 88 S&P 500 companies that have reported earnings for 23Q1 have surpassed analyst expectations. This performance is notably higher than the long-term average of 66.3% and the average of 73.5% over the past four quarters.
The decline in earnings highlights the challenges faced by various industries as they navigate the shifting economic landscape. Factors such as inflation, supply chain disruptions, and global geopolitical tensions may have contributed to this downturn. The steeper decline when excluding the energy sector could indicate that some industries are more vulnerable than others, potentially due to sector-specific headwinds or reduced demand for their products and services.
However, the fact that a significant percentage of S&P 500 companies have managed to outperform analyst estimates demonstrates resilience and adaptability in the face of adversity. These companies may have benefited from effective cost management, innovation, or strategic decision-making to overcome challenges and deliver better-than-expected results.
As we approach the week of April 24, market watchers will be closely monitoring the earnings reports of an additional 178 S&P 500 companies. These reports will provide further insight into the overall health of the economy and may reveal patterns or trends that could shape future expectations for the remainder of 2023. Investors, analysts, and industry experts will be paying close attention to these results to better understand the broader implications of the current financial landscape and adjust their strategies accordingly.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Case Shiller HPI I expect S&P CoreLogic Case Shiller national home prices to grow 2.0% y/y in February, cooling from January’s 3.8% growth. Mortgage rates and low inventory will impact affordability and home price declines.
Consumer Confidence I predict April’s Conference Board consumer confidence index to rise to 104.5 from 104.2. Despite regional banking crisis and potential labor market cooling, easing inflation should improve the outlook.
New Home Sales I anticipate new home sales falling to 630k saar in March from 640k saar. Higher mortgage rates may affect homebuyer decisions, but demographic trends and limited existing home inventory could support new home sales.
Durable Goods Orders I expect a 1.0% m/m increase in headline durable goods orders in March after a 1.0% decrease in February. Excluding transportation, I forecast a -0.2% m/m print, with core capital goods orders at 0.1% m/m and shipments also at 0.1%.
Advance Goods Trade Balance I predict the March advance goods trade deficit to narrow to $90.0bn from $91.6bn, with imports declining more than exports due to high interest rates and global demand slowdown.
Initial Jobless Claims I expect jobless claims to increase to 250k in the week ending Apr 22, reflecting layoffs in the technology and finance sectors. This suggests labor market softening and potential headwinds from labor hoarding.
GDP 1Q (A) I believe GDP growth for 1Q will be 2.0% q/q saar, down from 4Q’s 2.6%, driven by investment slowdown. However, strong labor market conditions and household spending may keep the economy in recovery longer than anticipated.
Pending Home Sales I forecast a 1.0% m/m increase in March pending home sales, following a 0.8% m/m increase in February, as the housing market seeks stability amid stabilizing mortgage rates and home prices.
Personal Income & Outlays I estimate a 0.1% increase in nominal personal income in March, with flat nominal spending. Real spending likely fell by 0.1%, increasing the saving rate to 4.7%. Core PCE inflation is expected to rise by 0.3% m/m, with y/y rate falling to 4.5%.
Employment Cost Index I forecast a 1.0% q/q increase in 1Q 2023 ECI, leading to a y/y rate decrease from 5.1% to 4.6%. This would signal cooling wage inflation, supported by recent average hourly earnings growth.
Chicago PMI I predict a decline in Chicago PMI from 43.8 in March to 43.0 in April, marking the eighth consecutive reading below 50. The production index is likely to fall, and the employment index may retrace some of its recent gains.
U. of Michigan Sentiment I expect the University of Michigan consumer sentiment index to finalize at 63.3 in April, down slightly from the preliminary reading of 63.5. Gas prices and inflation expectations may contribute to the decline.
Traders, please be cautious when putting on a trade during these announcements.
Global Spotlight
Yoon’s US Visit: Alliance Celebration, Auto Industry Exemptions, and Ukraine Support South Korean President Yoon Suk-yeol is set to meet US President Joe Biden during an April 24-29 visit commemorating the 70th anniversary of the US-South Korea alliance. Yoon is anticipated to seek exemptions for South Korean car manufacturers regarding tax credits in the Inflation Reduction Act, while Biden will likely urge Yoon to increase South Korea’s support for Ukraine amid Russia’s invasion. A potential shift in Seoul’s stance on humanitarian aid for Ukraine may also be discussed if Russia commits major war crimes or human rights violations.
Lula’s European Diplomacy: Brazil’s Stance on Ukraine, Deforestation Funding, and Trade Relations Brazilian President Luis Inacio Lula da Silva will engage in high-level talks in Portugal and Spain from April 21-26, covering topics such as Brazil’s position on the Russia-Ukraine conflict, funding to combat deforestation, and enhancing economic and trade ties. Lula will likely request Spain’s support for the final approval of the EU-Mercosur free trade agreement, although significant opposition from countries like France may hinder its progress.
Uganda’s Anti-LGBTQ Legislation: Strengthening Provisions and International Consequences Ugandan President Yoweri Museveni is due to meet with parliament on April 25 to reinforce certain provisions of the already harsh 2023 Anti-Homosexuality Bill, which imposes the death penalty for “aggravated homosexuality” and 20-year prison sentences for “promoting homosexuality.” The specific provisions Museveni aims to strengthen remain uncertain, but the bill has already incited a wave of arrests, evictions, and mob violence against LGBTQ individuals. International backlash, including potential aid suspension, visa restrictions, and warnings from companies like Google, may negatively impact Uganda’s economy and foreign relations.
Stratfor.com
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
- 23Q1 Y/Y earnings are expected to be -4.7%. Excluding the energy sector, the Y/Y earnings estimate is -6.1%.
- Of the 88 companies in the S&P 500 that have reported earnings to date for 23Q1, 76.1% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 73.5%.
- During the week of Apr. 24, 178 S&P 500 companies are expected to report quarterly earnings.
Year-over-year earnings for 23Q1 are projected to decline by 4.7%, with an even steeper drop of 6.1% when excluding the energy sector. So far, 76.1% of the 88 S&P 500 companies that reported earnings for 23Q1 have exceeded analyst estimates, surpassing the long-term average of 66.3% and the previous four-quarter average of 73.5%. In the upcoming week of April 24, an additional 178 S&P 500 companies are slated to announce their quarterly earnings.
Macro Market
Growth: I’ve observed that GDP growth slowed down to 0.9% in 2022 (4Q/4Q), and I now expect it to decline further to -0.1% in 2023 (4Q/4Q) due to the lagged effects of tighter monetary policy and financial conditions. However, I believe the economy will recover by the fourth quarter of 2024.
Inflation: In my view, a mild recession in 2023 and ongoing goods deflation should lead to disinflation this year. I’ve noted that headline PCE grew at 5.7% in 2022 (4Q/4Q) and expect it to grow at 3.1% in 2023. Core PCE, on the other hand, grew at 4.8% and is expected to come in at 3.2% in 2023. Based on my forecast, inflation should be broadly in line with the Fed’s 2% mandate by the end of 2024.
Federal Reserve: I have revised my expectations and no longer anticipate a 25 basis point rate hike in June. I now foresee a terminal rate of 5.0-5.25% by May and maintain my expectation of the first rate cut occurring in March 2024. In case the stresses in the financial system are reduced quickly, I believe that stronger macro data could lead the Fed to implement additional hikes beyond May.
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