by Franklin J. Parker, CFA
Earnings season begins this week with big banks like JPMorganChase, WellsFargo, Goldman Sachs, and Comerica. Overall, earnings at big US companies are expected to grow by about 3%. Given how much higher the S&P 500 has run, 3% earnings growth is pretty dissapointing. Also important: a higher percentage of companies are giving negative guidance on their earnings — that is, they expect their own earnings to be getting worse this year.
This week we also see the all-important inflation figures. Analysts expect a 3.4% inflation rate, much higher or lower is likely to push prices around because inflation is the main figure that the Federal Reserve is watching. A figure too low would be seen as accelerating the Fed’s coming interest rate cuts. A figure too high would be seen as delaying them longer. At the moment, everyone expects about two cuts this year, with the first coming in June.
Employment remains the bright spot for the US economy. Last week, the unemployment rate came in slightly lower than the month before, which is good news. Job openings also remained high. Employment is typically the last domino to fall in a recessionary situation, and continued strong employment is a good sign amidst a sea of otherwise poor economic data.
Let’s connect.
Chart of the Week
Over the last year, we have seen stock prices grow faster than earnings in large US companies. Ultimately, growth in stock prices has to be driven by growth in earnings, so when the two mismatch for too long, markets become brittle and easily rattled. Not counting the Covid timeframe, this is the largest mismatch between price growth and earnings growth in the last 15 years or so.
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