Sightline Weekly Market Update: Mixed Week for Stocks with Focus on Earnings

With a focus on earnings, stocks finished this week in a mixed state. Four tech stocks had the biggest impact on the S&P 500, accounting for half its gain – Microsoft, Apple, Amazon and Facebook. Cyclical stocks, such as consumer discretionary and industrials, struggled, as investors considered economic data pointing to an economic slowdown, particularly in manufacturing. Oil and the Canadian dollar, along with the TSX, drifted lower in the week. European stocks fell, responding to fears that the higher rates might push the economy into a recession.  

According to FactSet’s preview of Canadian earnings estimates, the estimates for companies in the S&P/TSX Composite are expected to decline for the first quarter of 2023 by 8.9%. The decline was larger than the five, ten, fifteen and twenty-year averages. Of the 11 sectors, 10 reported declines in estimates during the quarter, led by energy (-20.9%), materials (-17.6%) and consumer discretionary (-16.2%)1. In the U.S., at the mid-point of Q1 earnings season, S&P 500 companies have exceeded analyst expectations with earnings surprises exceeding the ten-year averages. With over half of the S&P companies reporting, 79% have reported earnings 6.9% above EPS estimates – lower than the five-year average of 8.4%, but higher than the ten-year average of 6.4%. While exceeding expectations, the blended, combining actual results for companies that have reported and estimated results for companies that have yet to report, earnings declined for the first quarter by 3.7% today. The latest reading is lower than the estimate a week ago at -6.3% and on March 31 with -6.7%. Consumer discretionary and industrial sectors lead the five sectors in earnings growth, and materials and healthcare lead the declining six sectors. 74% of the reporting companies’ revenues have reported an aggregate increase above estimates of 2.1%. Multiple sectors enjoyed revenue surprises. This was led by the consumer discretionary, industrials, energy and healthcare sectors, which were the most significant contributors to the overall revenue growth rate increase. For Q2, analysts expect an earnings decline of 5%, and in Q3 and Q4, a turnaround with a growth rate of 1.7% and 8.8%, respectively2

On Tuesday, the S&P Case Shiller 20-city house price index rose 0.1% in February for the first time in eight months. Year-over-year prices are up 0.4% – down from January’s 2.6% increase. West Coast residential real estate continues to decline, while the rest of the country showed increases3. Also on Tuesday, the Census Bureau reported sales of new, single-family homes jumped 9.6% over February. The median house price sold in March was $449,800, with an average price of $562,400. House inventories at the current sales rate stood at 432,000, representing a 7.6-month supply4

The Conference Board reported that consumer confidence fell in April to 101.3 from 104.0 in March. The Present Situation Index, which is based on consumers’ assessment of current business and labor market conditions, increased to 151.1 from 148.9 last month. The Expectations Index, which is based on consumers’ short-term outlook for income, business and labor market conditions, fell to 68.1 from 74.0. The Expectations Index is below 80 – a level that could predict a recession within the following year. Except for a modest uptick in December, the Expectations Index has been below 80 since February 2022. Interestingly, the expectation of consumer inflation one year out remains stubbornly high at 6.2% but lower than the highest reading of 7.9% reached last year5.  

On Wednesday, the government reported that durable goods orders jumped 3.2%, resulting from new airline and automotive orders. Excluding transportation, new orders rose 0.3%. Shipments and unfilled orders were also up, while inventories fell6.

On Thursday, the Bureau of Economic Analysis reported the GDP for Q1 grew at a tepid pace of 1.1% annualized. A decline in business investment is offsetting strong consumer spending. The government said that disposable income rose by 12.5% in the first quarter, real disposable income increased by 8.0% and savings increased to 4.8% from 4.0% in the fourth quarter7. Initial jobless claims fell by 16,000 to 230,000, and claims for all benefit programs for the week ending April 8 fell by 6,419 to 1,815,4918

On Friday, the U.S. government reported the employment cost index rose by 1.2% in the first quarter after gaining 1.1% in the last quarter of 2022. Increasingly, compensation slowed to 4.8% in the quarter from 5.1% in the previous quarter of 20229. The Fed’s preferred inflation indicator’s PCE index rose by 0.1% in March, and its year-over-year rate rose by 4.2% compared to 5.1% in the prior month. The more closely-watched core PCE index rose by 0.3%, with the core annualized rate of inflation drifting lower to 4.6% from 4.7%. The rate of inflation remains sticky and might not be good news for the Fed10. Finally, on Friday, the University of Michigan released the U.S. Index of Consumer Sentiment, which had improved to 63.5 from 62. There were also improvements in the U.S. Current Economic Conditions Index and the Index of Consumer Expectations11.  

While the data is mixed, a recession is highly likely in the later stages of 2023 and into 2024. If the U.S. Fed cannot tame inflation, interest rates will likely remain higher longer than market participants would like. Slowing growth and inflation could be the recipe for stagflation, as we move into what we expect could be a challenging election year in 2024. 













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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

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