ND&S Weekly Commentary 2.6.23 – Markets Shrug Off Weaker Earnings and a Rate Increase

Investors had plenty to digest last week, with an expected fed rate increase, conflicting earnings reports from big-tech companies, and a slew of economic data and events reported.

The S&P 500 gained 1.6% this past week, the Nasdaq rose 3.3%, while the Dow Jones Industrial Average slipped 0.2%. Despite lackluster earnings reports from Apple, Alphabet, Microsoft and Amazon, investors were encouraged by their cost cutting moves. Facebook (META) surged 23% on Thursday as a result of stronger sales and a $40 billion stock buyback. International equities were mixed with developed markets (MSCI-EAFE) up 0.5% and emerging markets (MSCI-EM) down 1.2%.

As expected, the Federal Reserve raised its target for the fed funds rate by 25 basis points and signaled that two more rate hikes could be expected. However, the Fed acknowledged that inflation has been easing and the past rate increases have been doing their job.
Of the 251 companies within the S&P 500 index reporting for Q4, about 52% exceeded analysts’ revenue estimates and roughly 70% topped earnings projections, according to Bloomberg. Admittedly, the street has been ratcheting down estimates given weakening economic conditions. Overall, corporate earnings are expected to contract 5% on a year-over-year basis.

The Labor Department reported that there were 517,000 new jobs created in January, blowing away economist’s expectations. The unemployment rate fell to 3.4%, the lowest since 1969 and well below expectations of 3.6%. The strong jobs report created concerns that the Federal Reserve may have to continue raising rates to cool inflation and curb consumer spending.

Despite a bouncy ride, the 10-year U.S. Treasury note was little changed for the week, ending at 3.53%. Oil prices slid 7.8% to $73 per barrel and are down 40% from their peak last year.

With mixed economic data and corporate earnings, the Fed maintaining a somewhat hawkish stance and worries of a recession, market volatility will continue. The markets have sprung back nicely and look to be ahead of themselves. Since mid-October, U.S. equities are up 16%, international markets have surged 25% and bonds have rebounded 9%. We would recommend remaining globally diversified and being patient about investing high yielding cash balances.

The economic reports this week are relatively sparse with wholesale inventories and consumer credit being reported.

“I rub it in pretty good when I win.”Tom Brady