Stocks Choppy as Investors Parse Economic Signals

John Smith

Investors on Monday saw mixed signals about the economy and business profitability, sending major U.S. stock indices in opposite directions.

At lunchtime, both the S&P 500 and the Dow Jones Industrial Average had dropped by 0.3% and 0.5%, respectively. Nasdaq Composite, which is heavily weighted with technology stocks, gained 0.1%.

Even as crude oil prices reached their highest levels since November 2022, oil and gas equities led the market lower by retreating from an early rise. After gaining 1.1% at the open, the Energy subsector of the S&P 500 lost ground and was up only 0.3% at midday.

After initially gaining as much as 1.5%, shares of Marathon Petroleum Corp were up 0.7%. After opening up 1.7%, Valero Energy Corp. clung to a gain of 0.8%. Oil prices rose as the U.S. benchmark Brent crude neared $87 per barrel and the international benchmark U.S. crude surpassed $80 per barrel.

Energy stocks had a strong start to the year, but analysts say they may be taking a break.

In spite of oil prices being at multi-month highs, energy equities appear to be losing pace, according to Fundstrat’s head of technical strategy, Mark Newton. So far in 2023, the Energy subsector of the S&P 500 has increased by 15%, significantly outperforming the index as a whole. After such a dramatic increase, a time of calm is warranted.

Semiconductors and pharmaceuticals were two more industries that saw profit stealing. After the chairman of the vaccine manufacturer reduced his position, shares of Moderna Inc. fell 7.4 percent, the most among all decliners on the S&P 500. On Friday, the United Kingdom gave Moderna the green light to launch its COVID-19 booster to Omicron.

Micron Technology Inc., a downtrodden chipmaker, gained 1.2% after Deutsche Bank boosted its price target and upgraded the company. The Philadelphia Semiconductor Index fell 0.6% despite this.

Arm Ltd., a semiconductor designer that just went public, had its stock price decline 4.7% as analysts who were just starting to cover the company issued cautious forecasts. Despite Arm’s roughly 25% increase on its first day of Nasdaq trading last week, both Needham and Bernstein started the stock at hold or underperform, saying its valuation seems stretched.

Despite an initial 3.5% drop, Tesla Inc.‘s share price is now down only 1.4%. Goldman Sachs lowered its price objective for the electric vehicle manufacturer because of the danger of future price decreases.

The shares of Ralph Lauren Corp., a retailer, rose by 2.2% after Guggenheim upgraded them to buy, citing the company’s strengthening fundamentals. DoorDash Inc. shares increased by 2.3% after Mizuho Securities upgraded the company.

Market observers have seen mixed messages recently regarding consumer demand and company profits.

“It’s a bit of a mixed picture for markets right now,” said Cornerstone Wealth’s chief investment officer, Cliff Hodge. Earnings for the fourth quarter have generally surpassed expectations, but consumer spending is showing indications of decline.

The minutes from the Federal Reserve’s policy meeting in January were released last week, and they revealed that officials continue to believe that additional rate hikes are necessary to drive inflation down. Meanwhile, increasing borrowing costs dampened consumer demand, leading to a steeper-than-anticipated decline in December retail sales.

According to Hodge, “markets are wrestling with weaker consumption data and what it means for corporate profits going forward.” But the tight labor market and robust consumer balance sheets indicate that a major downturn in the economy may yet be avoided.

While market volatility remains high, rising inflation expectations have raised the prospect of a rate cut from the Federal Reserve later this year. The S&P 500 index rose 6.2% in January, marking its highest January performance since 2019.

Many Federal Reserve officials are slated to speak this week, and investors are listening attentively for hints about the future of monetary policy. On Tuesday, we’ll get the results of a survey of purchasing managers, as well as the newest reading on whether or not inflationary pressures are easing.

According to Nancy Davis, founder of investment advisory firm Quadratic Capital, “the market seems optimistic the Fed can achieve a soft landing, but there are still risks if inflation remains persistent.” As investors price in both a Fed turn and recession worries, we anticipate continuing volatility.

FactSet estimates that fourth-quarter earnings would fall by 2.8% with almost half of S&P 500 companies having reported. That’s better than the 4.6% reduction predicted as of December 31st, so companies appear to be exceeding even more pessimistic forecasts.

Materials, industrials, and consumer discretionary are predicted to see the highest earnings declines among the 11 key S&P 500 sectors. Although inflationary pressures have been lessening, rising wages and greater input costs have strained profit margins.

Companies including Walt Disney Co., PepsiCo Inc., Shopify Inc., and Palantir Technologies Inc. will release quarterly results this week. Indicators of consumer demand and the outlook for 2023 will be actively monitored by investors.

“Equities seem to be in wait-and-see mode in terms of earnings,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said. Investors are looking for evidence of stabilization in profit growth, so “guidance” is crucial even though outcomes so far have been better than feared.

Valuations are still high relative to history since equities are trading above epidemic lows. According to FactSet, the forward price-to-earnings ratio for the S&P 500 is near 17. This is lower than the over 21 predicted at the beginning of 2022, but still much above the 5-year average of over 18 predicted.

Stocks will likely face difficulties in 2023 due to high valuations and the continued lack of clarity surrounding corporate profitability and the economy. Inflation appears to have peaked, giving investors faith that the Fed can guide the economy to a smooth landing.

Hodge cautioned that “we are not yet completely out of the woods,” but that improved inflation figures raise hopes for a sustained economic boom. That might help stocks continue rising as the year progresses, barring a drastic downturn.

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John Smith is a veteran stock trader with over 10 years of experience in the financial markets. He is a widely followed market commentator known for his astute analysis and accurate predictions. John has authored multiple bestselling books explaining complex market concepts in simple terms for novice investors looking to grow their wealth through strategic trading and long-term investments.
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