The Weekend Edition # 82
Mixed Labor Data; Earnings Season begins; What I'll be watching for with earnings
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and welcome to all the new subscribers this week!
Here’s what we cover:
Market Recap - Mixed Labor Data
Macro and Earnings - Earnings Season begins
Article of the Week - Who will weather the storm?
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - What I’ll be watching for with earnings
Let’s dive in ⬇️
Market Recap - 03 Apr - 06 Apr, 2023 📉📈
We had a shorter week with Friday being a holiday, but no less eventful when it came to the economic data. The unemployment report was released on Friday, despite it being a market holiday but the futures certainly responded. The S&P500 futures had quite the bullish reaction to the report.
The report itself was odd to me. Prior to Friday we got four pieces of jobs data:
Initial jobless claims decreased for the week, but the previous week’s data was revised upwards from 198,000 to 246,000.
JOLTs - Job Openings dropped to 9.931M from 10.563M
ADP Employment Change dropped to 145K from 261K
Challenger Job Cuts rose 15% in March
And ISM reports - Manufacturing and Services - came in contractionary but, also both showed weak employment data.
All the signs point towards unemployment increasing under the surface, even if the Jobs data shows a decreasing level for unemployment and an increase in payroll data. Average hourly earnings decreased and that perhaps is what gave people cause to celebrate, as it will weigh less on inflation.
Nevertheless, we have other issues to worry about where inflation is concerned. The foremost being the price of oil. After last week’s announcement of cuts by OPEC, oil not only gapped up as trading opened for the week but, has remained persistently high throughout the week. This will not last but, for now it’s something to take into consideration.
As for the market, we’re preparing for earnings season but the boost from Friday seems to have put the market into a bullish mode. The SPX closed at the 4100 mark on Thursday and that seems to be acting like quite the magnet when in comes to short term trading.
One things for sure, the market isn’t thinking about rate cuts anymore. We’d seen Fed Funds Futures pricing in the probability of a pause for May and that’s now changed, so has the probability of rate cuts for 2023.
We also have CPI on Wednesday, PPI on Thursday and Retail Sales on Friday along with Bank Earnings.
Macro & Earnings - Earnings Season Begins 🌎📝
This is going to be an important earnings season. While we’ve had a few earnings already released for Q1, 2023, I really like to mark the beginning of earnings season with the Banks starting off with JP Morgan on Friday, April 14.
I wrote a more generic article last Tuesday about what lies ahead. It’s linked below and free to read. But, I thought a preview of the stats would be interesting to cover given that it’s quite likely we will see significant re-rating in the earnings this time.
So far, we seem to be reporting growth far below what is expected. This will no doubt, improve as we get through earnings season but, we’re likely to still see a significant decline.
The expected earnings decline for Q1, 2023 is -7%. The market expects this to be the trough in earnings season with the Q2 showing an improvement, albeit a very marginal improvement. Remember these are just estimates for now and it can always get worse.
The largest decline this time around seems to be estimated in the Materials Sector followed by Healthcare. As far as industry groups are concerned, Semiconductors are expected to see a -42% EPS decline, while Consumer Durables and Apparel are expected to see a -33% decline.
A major consideration this quarter is the drop in Net Income Margin, as you can see in the 4th column above. According to Goldman Sachs, margins will take the biggest hit since the pandemic lows. If you look at the chart below, this is recessionary margin territory.
Finally, 87% of the S&P500 (by market cap) will report by May 05, 2023, with the major week being the last week of April. ⤵
Article of the Week 📖
The article above is free to read. Please do consider upgrading to my premium newsletter for only $10/month or just $100/year. I offer original research regularly focused on macro updates, industry reviews, stocks, and more.
The Week Ahead 📅
Economic Calendar in Eastern Time - April 07 is scheduled to be a market holiday
We talked about seasonality vs. earnings last week. Given that we now know the stats and that the majority of earnings will take place by the end of April, I have a feeling earnings will win the battle this quarter.
I was looking at JP Morgan’s Annual Report which was published last week, along with Jamie Dimon’s letter. It’s another round of gloom and doom with him discussing that the trouble with banks are far from over, and that recession is quite probable. While I do believe his words to be true, I couldn’t help but marvel at the numbers that JP Morgan had put up last year. They really do have a fortress balance sheet.
All eyes will certainly be on JP Morgan on Friday and Wells Fargo & Citi to a lesser extent. The major attention will be on unrealized losses but, the attention should be on provisions. These banks don’t have as much of a problem with their held-to-maturity treasuries, but the trajectory of their provisions will be important to track.
Albertson’s (Grocery) reports on Tuesday and that can give us a peek at consumer spending; LVMH reports on Wednesday and that gives us a look at luxury spending and insight into the revenge spending from China. Thursday we have Delta to give us a heads up about travel and Fastenal to give us a preview of the Industrials.
Here’s wishing you safe investing.
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Ayesha Tariq, CFA
There’s always a story behind the numbers.
Another great read, Ayesha!
Through analysis, Ayesha! Thank you