Earnings And Yields Dominate Stocks

Last week was a bit of a flashback to 2022 with bond yields weighing on stocks...getty

Despite the overall earnings picture improving, the S&P 500 fell by 1.1% for the week. There was little economic data, but rising yields weighed on stocks, especially growth stocks that had performed well year-to-date. According to FactSet, 69% of companies have exceeded earnings estimates, below the 10-year average of 73%. This week earnings season starts to ease, with only 60 S&P 500 companies scheduled to report.

Blended earnings, which combine actual with estimates of companies yet to report, are lower than forecasts at the end of the quarter but improved last week. The high earnings growth rate for the industrials is misleading since the airlines reported a loss in the fourth quarter of 2021 and posted a profit this quarter.

Consumer staples, real estate, health care, and materials remain the four sectors expected to post higher earnings than forecasted on December 30th. The energy sector earnings estimates held steady and retained the crown with the highest expected growth rate driven by increased energy prices, with expected earnings slated to increase by 58% year-over-year.

Berkshire Hathaway BRK.B +0.9% continued to buy shares of Occidental Petroleum OXY +3.8% (OXY) in 2022 and now owns over 20% of the company. A previous piece discussed why Warren Buffett’s Berkshire Hathaway likes its holdings in Occidental Petroleum.

Blended revenues improved again last week and are well above the expected level at the end of the quarter. Energy, industrials, real estate, consumer staples, health care, utilities, and consumer discretionary have better estimates than at the end of the quarter. Sales in the energy sector illustrate the robust increase in energy commodity prices.

Despite the improvement in fourth-quarter earnings expectations, expected earnings growth for the calendar year 2023 declined again this week and now stands at 2.5% year-over-year.

The communications services sector was the most significant contributor to the improvement in blended earnings for the S&P 500. Earnings beats by Walt Disney DIS -2.1% (DIS) and Activision Blizzard ATVI +0.3% (ATVI) positively impacted the communications services sector. As discussed previously, margin pressures have become more evident, with sales coming in as expected but earnings disappointing during this fourth-quarter earnings season.

Outside of earnings season, comments by Federal Reserve Chair Powell left the path of future hikes as data-dependent. Fed statement combined with recent data pointing to a stronger-than-expected economy, including the breathtakingly robust jobs report, have boosted bond yields relatively rapidly. Since last year, rising bond yields have generally weighed on stocks; last week was no exception.

After the better economic data and Fedspeak, markets are pricing in two more short-term interest rate hikes of 25 basis points (0.25%) in March and May hikes, with one possible cut by January 2024. This week holds some meaningful reports for financial markets and rate hike expectations, January consumer inflation (CPI), and retail sales.

Though the more economically sensitive cyclical stocks underperformed last week, they have trounced staples since the beginning of the year. This market action in 2023 points to fewer worries about the recession currently being priced into the market.

Headline earnings improved last week but remained below estimates at the end of the quarter. Still, stocks have focused more on macroeconomic factors like higher bond yields and the rising odds that the U.S. might avoid recession.

Companies will remain particularly sensitive to forward guidance from companies while the threat of recession in 2023 remains. This week’s consumer inflation (CPI) and retail sales reports will be crucial as markets try to divine the path of interest rates and the economy.