by Franklin J. Parker, CFA
Earnings season continues. As it stands, big US companies are still expected to deliver no growth in profits this quarter over this time last year. This week we see figures from Meta (Facebook), Microsoft, and Alphabet (Google). To get a sense of how much the top 7 stocks are influencing the market as a whole: if we factor out the top 7 stocks from the 500 companies in the S&P 500, earnings growth goes from flat to -6%. I am concerned that most companies in this market are not delivering any profit growth, and this may be a signal that the recent run-up in prices is driven more by hype than underlying fundamentals.
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The big news last week was Fed chair Powell’s comments that rates would likely stay higher for longer if inflation doesn’t move lower. This spooked investors, and pushed bond yields higher and stock prices down. It is a reminder that policymakers do not appear to be okay with the “it’s good enough” argument. They really are committed to inflation at 2% or less. Investors are now expecting rates to begin dropping in August and November, rather than June (which was the previous expectation).
We get some important economic data this week, including a first look at first quarter economic growth (GDP), earnings, and durable goods. The Fed’s commentary last week was yet another example of investors getting their rate cut projections wrong — officials have consistently kept their policy response more galvanized than markets expected. Combined with the problems in commercial real estate and weak economic signals, I am still cautious.
Chart of the Week
Retail sales are a closely-watched figure lately, and rightfully so. In the US, consumer spending is almost three-quarters of economic growth. Looking at the raw figure, retail sales look like they have been holding up — however, when factoring out the effects of inflation, we see that retail sales have been largely flat over the last 18 monts or so. This is a concern, and may help explain why companies have struggled to increase earnings over that same period.
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