S&P 500 (SPX) rose 1% last week after investors used a Thursday mini-selloff as a buying opportunity. Moreover, recent economic data shows the U.S. economy is performing stronger than expected, fueling bets that the Federal Reserve will still manage to deliver a soft landing.
While the Fed hiked again last week and reiterated its concern over still-elevated inflation, market participants currently do not expect further rate hikes this year.
Nasdaq Composite Index (IXIC) gained as much as 2% last week, underpinned by gains on mega-cap stocks like Meta Platforms (NASDAQ: META ) and Google-parent Alphabet (NASDAQ: GOOGL ). Amazon (NASDAQ: AMZN ) and Apple (NASDAQ: AAPL ) are due to report on Thursday after the market close.
“The current setup is fairly similar to last quarter, where the combination of a low hurdle rate, along with the improving fundamentals, eventually led to meaningful beats. Q2 EPS projections for S&P 500 were cut significantly ahead of the reporting season, and most macro data showed a sequential improvement versus Q1,” JPMorgan analysts wrote recently.
Dow Jones Industrial Average (DJI) continues to rise, recording its 3rd consecutive weekly gain. The index also hit the highest levels seen since last February.
Apple and Amazon to report
According to FactSet, 51% of S&P 500 companies reported actual results as of Friday, July 28. As many as 80% of S&P 500 companies have reported a positive EPS surprise while 64% of S&P 500 companies reported a positive revenue surprise.
The blended earnings decline so far for the second quarter is 7.3%, worse than the expected decline of 7%. For Q3 2023, 27 S&P 500 companies have issued negative EPS guidance and 18 S&P 500 companies have issued positive EPS guidance, FactSet data shows.
“For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 0.4%. For companies that generate more than 50% of sales outside the U.S., the blended earnings decline is -20.8%,” analysts at FactSet wrote.
Citi analysts are increasingly bullish on the S&P 500’s earnings potential for 2024, hence they raised the 2023 year-end price target to 4600 and the mid-2024 target to 5000.
“These new targets will be perceived as chasing the year-to-date move in the S&P 500. However, they better reflect an evolving macro and fundamental backdrop,” they said.
Ahead of us is another super busy earnings week. Major reporting companies include Caterpillar (NYSE: CAT ), Pfizer (NYSE: PFE ), Uber (NYSE: UBER ), AMD (NASDAQ: AMD ), Starbucks (NASDAQ: SBUX ), PayPal (NASDAQ: PYPL ), Qualcomm (NASDAQ: QCOM ), Apple, Amazon, Block (NYSE: SQ ), as well as online travel companies like Booking (NASDAQ: BKNG ) and Airbnb (NASDAQ: ABNB ).
What analysts are saying about U.S. stocks
JPM: “We were OW Value vs Growth style in 2022, through longs in Commodities and in Financials, against an UW Tech, but have reversed that view for this year, partly driven by the above call from last October that US yields have peaked. We think that the OW Growth vs Value style should stay relevant through the rest of 2023.”
Sevens Report: “We and others said at the start of the year that economic data would drive this market in 2023, and that’s what’s happened. The data has been Goldilocks, inflation has fallen, and the Fed isn’t worse than feared. But just like those were positive surprises YTD, they can also turn into negative surprises, as anyone who was in this business in ’99-’00 and ’07-’08 can tell you.”
Morgan Stanley: "Consider preparing portfolios for a period of higher-for-longer rates, powered by both real and inflation-expectations components. That means trimming exposure to the most richly valued US stocks and rotating toward those with growth at a reasonable price or value attributes and visible earnings achievability."
Goldman Sachs: “S&P 500 has a long-term track record of outperforming other global equity markets so “hope over experience” may be the reason why investors YTD have been net sellers of US stocks and ETFs and net buyers of international equities. The large Information Technology sector weight is one key driver of the superior returns. Our analysis suggests the focus by US executives to improve return on shareholder equity (ROE) is also an important contributor.”
Vital Knowledge: “The market’s near-term “story” should stay bullish (goldilocks data, Fed ending, healthy earnings, China stimulus, etc.), which makes this a tough tape to avoid from the long side and an especially difficult one to be short. Our main problem is still valuation (especially given where rates are).”
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