The U.S. stock market remained cautious in February, continuing to react to higher overall costs while also projecting lower earnings growth in the months ahead. Nearly all sectors of the S&P 500 Index posted negative returns for February, pointing to an overall pullback across all industries of the market. The technology-heavy Nasdaq Composite Index saw stronger performance relative to the Dow Jones Industrial Index and the S&P 500 Index. A stronger dollar continues to weigh on U.S. multinational firms whose incomes are heavily reliant on international sales.
Earnings Season …. It’s a Wrap
S&P 500 companies have reported their Q4 2022 results with 69% beating their earnings estimates according to FactSet. As we look to the current year, analysts are expecting earnings declines of roughly 3% to 5% in the first half of 2023, but growth in earnings is expected to pick up in the latter half of the year.
Delving into the numbers, although many companies beat their lowered earnings expectations, profit margins were significantly impacted such as Apple and Alphabet (parent company of Google) showing declines in margins of -10% and -50% respectively.
Economic Overview
Stronger-than-expected employment data along with surprisingly resilient consumer demand drove the Federal Reserve to raise short-term rates, resulting in rates rising this past month. Mortgage and consumer loan rates rose once again in February, adversely affecting housing and consumer durables, where interest rates pose a significant factor.
Recently released data from the Bureau of Labor Statistics reveals that consumers are pulling back on cyclical goods such as clothes and electronics while focusing on food and essential products like toilet paper and toothpaste. Larger ticket items such as appliances and autos (durable goods) are seeing a drop in sales as consumers redirect funds.
Investors have renewed their focus on consumer incomes and inflation, as average income growth continues to fall behind inflation, meaning that consumers are struggling to maintain regular spending habits without an immediate pay raise. A Federal Reserve Bank of New York survey showed that households expect income growth to drop, creating additional uncertainty for consumers as well as creating a negative impact on consumer confidence.
Inflation concerns persisted in February as government data revealed stubbornly elevated prices for food and energy. As a result, the Federal Reserve policy of raising interest rates is expected to continue. The Fed’s concern is that it might relent too soon in combating inflation, so it is expected to continue its rate increase trajectory until economic data proves otherwise. As a result, we can anticipate some further volatility in the financial markets.
Recent economic news coverage references the terms “soft landing” and “hard landing.” A soft landing indicates a non-recessionary outcome after the Fed stops raising rates, while a hard landing denotes a recessionary environment. Many economists believe that while it is too soon to determine which may occur, they are concerned that an extended period of rate hikes likens the possibility of an eventual hard landing.
Thus, heading into the second quarter a cautious outlook remains warranted. If employment were to dramatically decline or if economic growth stalls, we would expect the Federal Reserve to take note and perhaps pause the rate tightening cycle and avoiding a sharp downturn in the economy.
Navigating the shifting economic landscape, Parkview Capital will remain focused on helping you reach your goals and objectives through the inevitable shifts in the market. Whether your objective is growth of capital, income generation or a combination of both, together we will carefully evaluate your personal strategy, make changes as necessary and remain steadfast when prudent.
Thank you for the trust you place in me and Parkview.
With sincere regards,
David W. Malmgren, CFA
Founder and Principal
Parkview Capital
The information contained herein should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions that we make in the future will be profitable. The opinions stated and strategies discussed in this commentary are subject to change at any time.
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