Market Pulse

Market Pulse

February 14, 2022

In focus

Lower sentiment and sloppy market activity are being driven by volatile real-time news flow. Another terrific quarter of earnings has been tempered by concerns regarding the path of Federal Reserve (Fed) policy and the tensions on the Ukrainian border. Both of these risks, however, are known unknowns.

  • Nearly 70% of companies representing 83% of S&P 500 earnings have now reported. 77% of companies have reported a positive earnings surprise, 77% have reported a positive revenue surprise, and 60% have beaten both. Q4 earnings were expected to beat expectations by roughly 3% entering earnings season but have instead beaten by 6%. Corporations have issued cautious forward guidance, but profit margins continue to hover near record levels as corporations continue to adapt and innovate.
  • The Fed has signaled an end to quantitative easing, the commencement of rate lift-offs in March, and balance sheet reduction. In the last month, markets have reacted (perhaps over-reacted) with 2-year Treasury yields rising nearly 80 basis points and the NASDAQ Index, which contains higher-growth companies, falling 11.8% year to date. We think this could be a healthy reset in a year where we expect returns to moderate but continue in an upward trend as the cycle matures. It is important to distinguish that U.S. GDP growth today is more than double what it was in 2015, the last time the Fed began to tighten policy.
  • Key European leaders from France, Germany, and Ukraine are appealing to Russian President Putin to diffuse tensions along the Ukrainian border. Global markets remain sensitive to new developments in the region. This is a known risk that we are following closely but is part of the price of admission. Diplomatic efforts are in full force.

 

A look back

  • Global equities declined 0.4% last week, led lower by U.S. stocks as the S&P 500 shed 1.8%. International developed and emerging markets were positive on the week.
  • The U.S. yield curve flattened further last week as 2-year U.S. Treasury yields rose 19 basis points to 1.51% following hawkish comments from Fed officials and a higher than expected inflation report.
  • Geopolitical tensions continued to escalate as a result of Russia’s military build-up on the Ukrainian border, further adding to the risk-off sentiment.

A look ahead

  • S&P 500 Q4 earnings are on pace to exceed 30% year-over-year growth, coming in roughly 6% above expectations entering earnings season.
  • Speeches by multiple Fed officials and the Wednesday release of minutes from the January FOMC meeting will be closely scrutinized by market participants.
  • Economic releases: Producer Price Index, Retail Sales, Housing Starts, MBA Mortgage Applications, Empire Manufacturing, Existing Home Sales, Industrial Production, and the Leading Index.

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