Stocks continue to trade below the S&P 500 ( SPY ) high of 4,200 since early February. Thus investors are looking high and low for signs of corporate earnings that can tell them something about future market direction. Thankfully 40-year investment pro Steve Reitmeister is here to make sense of it all. Get his updated market outlook, trading plan and top picks in the commentary below.
Now is the time for the economic calendar to quiet down and earnings season to take center stage. The phrase that pays is…
Better Than Feared
That means expectations were incredibly low this earnings season with the average company expected to show a -9% EPS decline. Low hurdles like this are easy to overcome and seem to be making progress in the short term.
Unfortunately, it’s been a long time since the important Bull Vs. Bears really matter in the discussion. That, as always, will be the focus of this week’s Reitmeister Total Return commentary below…
Market Commentary
“Better than fear” is certainly the theme of this earnings season. Microsoft and Google’s earnings releases on Tuesday afternoon are prime examples.
These shares were significantly down in Tuesday’s session pending their results. That’s because estimates were cut slightly over time where Microsoft was expected to post flat year-over-year results while Google was seeing earnings decline by more than 10% year over year.
Hooray…they beat these low odds after hours with shares around 3-5%.
Despite the applause…Do such results bode well for the market going forward in the coming weeks?
This is where I off my friend Nick Raich EarningScout.com To get a comprehensive view of the earnings season to date:
- “We have some good news but more bad news about 2Q 2023 EPS forecast research trends for the first 89 S&P 500 companies reporting 1Q 2023 results through last week’s market close.
- The good news is that the rate at which 2Q 2023 EPS estimates are falling (-0.99%) for the first 89 reporting 1Q 2023 results is less than how their 1Q 2023 EPS estimates fell nearly three months after reporting 4Q 2022 results ( -1.63%). before
- Remember, less negative EPS estimate cuts usually lead to higher stock prices, and since October 12, 2022 the S&P 500 has been +7.66 YTD and +15.56% in 2023.
- Here is the negative. While EPS estimate cuts are less severe, the current percentage of companies raising estimates is the lowest we’ve measured since the height of Covid-19 fears in early 2020.
- A key reason why companies haven’t given analysts lower guidance and why analysts haven’t cut estimates further is the interest rate cut expected to begin in the fall.
- If interest cuts are delayed, 2H 2023 and FY 2024 EPS estimates will need to be cut significantly further.
- Finally, the stock’s valuation isn’t cheap, even based on the current overestimated FY 2023 EPS estimate, which is 18.72x.
- Fiscal 2023 EPS estimates will fall further in the weeks ahead, so all future stock gains will require a multiple extension.
- Stick to underweight stocks.”
Note that corporate earnings are a symptom of economic conditions. Thus, the weakness seen in places like ISM Manufacturing and Services is showing up with a sniffle and a fever this year, and a decline in earnings this year.
Thus, with valuations on the high side…and earnings estimates likely to fall further…then it is hard to envision a meaningful advance in the share price in the coming days.
On the other hand, investors have found little reason to sell meaningfully after a brief banking scare in March. Yes, it rekindled slightly on Tuesday with news of more trouble in the First Republic. The bottom line is that the illness doesn’t seem to be spreading meaningfully to other banks.
All this calls me limbo and the trading range is an expected result in the short term waiting for a clear catalyst to break bullish or bearish. Here’s the upcoming schedule of events that could serve as a possible incentive for that next big move:
4/27 Q1 GDP, PCE prices (the Fed’s favorite measure of inflation)
5/1 ISM Manufacturing
5/3 ISM services, Fed rate decision
5/5 Govt Employment Status
Now let me repeat something from last Friday’s POWR Value commentary:
“Catalysts to be bearish will be obvious. That is clear bearish evidence with the October low of 3,491 and possibly lower stocks.
Funnily enough, upstream catalysts can be very subtle. Only the absence of bad news = good news = stocks move higher.”
Right now, we are moving on these conflicting bullish/bearish themes with 50% remaining invested. Once evidence emerges tipping the scales in a more clear cut direction, our trading strategy will evolve appropriately over time.
Till then 50% invested plan will remain in effect. Happily, that has been helping us outperform the pack of late and expect that edge to continue.
What to do next?
Discover my balanced portfolio approach indefinitely. The same approach that produced impressive gains in the S&P 500’s decline in April.
The strategy was built on over 40 years of investment experience to appreciate the unique nature of the current market environment.
Right now, it is neither a boom nor a recession. Instead he is confused…unsettled…uncertain.
Yet, even in this unattractive setting we can chart a course of outperformance. Just click the link below to get right into the action:
Steve Reitmeister’s Trading Plan and Top Picks >
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Rayty (pronounced “righty”)
CEO, StockNews.com and Editor, Reitmeister total compensation
SPY shares rose $1.92 (+0.47%) in after-hours trading on Tuesday. Year-to-date, the SPY is up 6.59%, the % gain of the benchmark S&P 500 index over the same period.
About the Author: Steve Reitmeister
Steve is better known to StockNews audiences as “Raity”. He is not only the CEO of the firm, but also shares his 40 years of investment experience in the company Reitmeister Total Return Portfolio. Learn more about Ritty’s background, with links to her most recent articles and stock pics.
Post Does Q1 Earnings Season Change Stock Market Outlook? appeared first StockNews.com
—————————————————-
Source link