Market Pulse

In focus

Earnings season is wrapping up as investors are digesting first quarter results amid geopolitical uncertainty and tighter Federal Reserve (Fed) policy. So far, 87% of companies have reported with 20 more set to report this week. Common themes emerging include:

• 79% of companies have exceeded expectations, modestly better than the S&P 500’s 5-year average of 77%. Despite modestly positive earnings results, stocks have largely been unable to escape the recent drawdown in prices. The extent to which companies have beaten earnings expectations is much narrower than recent quarters, having been weighed down by the consumer discretionary sector with a -34% earnings surprise so far.
• Earnings growth, while positive, has seen lower growth rates than the past five quarters. To date, energy has been a bright spot, reporting +267% earnings growth, while consumer discretionary has seen earnings growth decline -46%.
• Utilities, which we upgraded to neutral at the beginning of March, has exceeded expectations more than any other sector, beating average earnings estimates by 19%, while growing earnings 23%.

First quarter earnings have been mixed, with a larger number of companies beating estimates but by a smaller margin. Negative sentiment has punished companies for slower growth and negative guidance. Although the range of potential outcomes is wide and many challenges remain, depressed investor sentiment means that the hurdle rate for positive surprises is low. In our view, this is a positive from a contrarian standpoint and is among the biggest assets for the market.

A look back

• Global stocks declined on the week with emerging and international developed markets lagging equities in the U.S. After a volatile week, the S&P 500 finished the week down -0.2%.
• U.S. Treasury yields ended the week higher after the Federal Open Market Committee’s (FOMC) 50 basis point (0.50%) rate hike. The 10-year U.S. Treasury yield ended the week at 3.12%.
• U.S. payrolls in April increased by 428,000, beating consensus estimates of 380,000. The unemployment rate was unchanged at 3.6%.

A look ahead

• Following the recent 50 basis point rate hike, investors will be closely monitoring inflation data with both consumer and producer prices being reported this week.
• Corporate earnings season continues this week with 20 S&P 500 companies set to report. 87% have reported so far this season.
• Economic releases: NFIB Small Business Optimism, Consumer & Producer Price Indices, Wholesale Inventories, Import Prices, and University of Michigan Sentiment.

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