United States for the Week-Ending May 24, 2024
Paul Young
Experience Senior Financial Planning, Analysis and Reporting SME seeking P/T or F/T job.
Equity markets were little changed this week, with the S&P 500 flat and the TSX dipping 0.6%. Stocks are holding near record highs in North America at a time when expectations of Fed easing are getting scaled back and longer-term Treasury yields are trending higher. Given that there’s not too much leeway in valuations—a discussion for another day—the market is relying more on the idea that earnings will remain solid.
With the Q1 reporting period now winding down—traditionally culminating with the Canadian banks—the results have been perfectly acceptable in the market’s eyes. With about 470 of the S&P 500 now reporting Q1 results, 78% have topped earnings expectations according to Refinitiv’s tally, with an average surprise of roughly 8%. These results are consistent with typical earnings-season norms. Technology and health have led the surprises, with those sectors beating at just under a 90% rate. Overall, that leaves S&P 500 earnings growth tracking at 8% y/y, compared to expectations of 5% y/y growth ahead of the reporting period in early April. So, while not a major upside surprise, there was good enough news to keep the bears at bay.
Where do we go from here? The market, always looking six-to-twelve months down the road, doesn’t appear to be seeing much trouble on this front. From a macro perspective, there are a few big-picture factors with a good history of dictating the path of earnings growth, and the picture is mixed:
Yield Curve: The deeply inverted curve was a serious concern for investors and does tend to lead earnings growth, not only by predicting economic growth, but also directly impacting specific sectors like banks. The curve had been steepening through the back half of 2023, but that progress has stalled with the 10s/2s curve stuck at around -40 bps. Rate cuts would of course help the steepening cause, but stubborn core inflation trends are making that unlikely in the near term.
Economic Growth: There are signs U.S. growth is moderating, with real GDP expanding 1.6% a.r. in Q1 and forecasted to run below potential through the rest of the year. That’s a marked shift from 3.1% y/y growth through 2023Q4. A true bull might argue that the 10% correction in the S&P 500 from last July through October already priced this soft patch in, and the recent rally reflects a re-acceleration in late 2024. As it stands now, some indicators like ISM new orders have stabilized in very modest growth territory, while payrolls have cooled.
The Big Dollar: A strong U.S. dollar tends to weigh on domestic corporate earnings though softer export demand and the direct conversion of foreign earnings. Indeed, the pullback in the trade-weighted dollar through 2023 is probably helping support growth right now. But that downward momentum has stalled as Fed easing get pushed further out, while other central banks are on the cusp of easing. We believe that eventual Fed easing will reassert some downward pressure on the U.S. dollar through 2025.
Profit Margins: Corporate margins are holding up well, and any steep contraction in profits as a share of overall GDP (a broad proxy for margins) that you’d ordinarily see at the onset of a recession/bear market is still absent. In fact, that measure is holding up well as firms pass on higher costs to consumers.
All told, it’s not ‘all systems go’ for earnings, but macro conditions currently suggest they will hold up—and the market clearly agrees.
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Paul Young CPA CGA
Paul is a former IBM Customer Success Manager that has deployed over 300 data and AI solutions across industry and geographies for the past 8 years. Paul is a Financial Planning, Analysis, and Reporting SME working with data including integration of macro and micro indicators as part of the integrated business planning and reporting cycle.
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