Last Week
The stock market remained under pressure, with the S&P 500 extending its losing streak to six consecutive trading days on Friday while posting its worst weekly performance in over a year. The decline moved the index into correction territory, down over 5% since the record high set at the end of March and below the critical 5,000-point level for the first time since late February. The retreat was driven by a robust March retail sales report, leading to another encore of the “higher for longer” hawkish Fedspeak chorus. Geopolitical concerns over Israel and Iran added to the risk-off mood and a bumpy start to the first quarter corporate earnings season. The Tech sector fared the worst following disappointing results from Dutch semiconductor equipment maker ASML and the world’s largest contract chipmaker, Taiwan Semiconductor.
The earnings growth rate for the first quarter is 0.5% today, compared to an earnings growth rate of 0.9% last week and an earnings growth rate of 3.4% at the end of the first quarter (March 31). Downward revisions in the Health Care sector from -7.1% to -30.8% have been the most significant contributors to the decrease in the earnings growth rate, specifically from Bristol-Myers Squibb and Gilead Sciences. In both cases, those revisions were related to accounting for acquisitions rather than actual business results.
The Financials sector has provided the most significant positive contributors to earnings for the index, with the blended earnings growth rate for the Financials sector increasing to 5.1% from 1.7%. Bargains abound in both large and small-cap financials, with Bank of America, JPMorgan Chase, Bar Harbor Bankshares, and Westwood Holdings Group as some of our favorite individual holdings and XLF, KBE, and KRE as interesting ETFs. The banking industry is well-capitalized and reserved for rising commercial real estate loan losses, as highly publicized throughout the last year or two. The banks that have reported 1Q24 results already have indicated they have reserved for between 5% and 10% of office real estate loans to default. Some further Net Interest Margin, or ‘NIM,’ compression also seems factored into valuations. Our constructive view seems warranted in select names recently raising their dividends, including JPMorgan Chase and Bar Harbor Bankshares.
Adding up the damage for the week, the S&P 500 dropped 3.1%, the Nasdaq Composite lost 5.5%, and the Russell 2000 shed 2.8%. Declining issues outnumbered advancing issues by a factor of more than 2-1, while only the Telecom and Utilities sectors were able to finish modestly in the green. It was rough for bond investors, as the yield on both the 2-year and the 10-year Treasury increased approximately 11 basis points to 4.96% and 4.61%, respectively. The gold price was resilient, rising 1.3% for the week.
More damage was done to Chicago sports fans’ psyches, as the Bulls’ season ended with a whimper in Miami, a 21-point loss to the Heat, who were playing without their superstar Jimmy Butler.
This Week
During the upcoming week, 158 S&P 500 companies are scheduled to report results for the first quarter, including three of the “Magnificent 7”: Meta Platforms, Microsoft, and Alphabet. Whereas we are wary of the high multiples on those popular stocks, five of the “Magnificent 7” companies are expected to report year-over-year earnings growth of 64.3% for the first quarter. Excluding these five companies, the blended earnings decline for the remaining 495 companies in the S&P 500 would be -6.0% for the quarter versus the 0.5% when those five are included.
The Energy sector could also be in focus, as Exxon Mobil and Chevron are scheduled to report earnings on Friday. Despite a slight year-over-year increase in the average price of oil, the volatile Energy sector is expected to report a decline of -25.6% in earnings, but with a rebound in the following quarter.
The most significant economic data report will also come on Friday when the BEA will release the personal consumption expenditure price index for March. Economists forecast a 2.6% year-over-year increase and a 2.7% advance in the core PCE, which excludes food and energy prices. The market has been susceptible to inflation data, so any minor variance from the consensus would likely move markets.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.