Market Commentary 05/25/23

More than 90% of S&P 500 companies have reported first quarter earnings, with most results exceeding expectations. Approximately 78% of S&P 500 companies reported first quarter earnings that surpassed consensus estimates, up from 68% in the fourth quarter of last year. This is also slightly above the 20-year average of 67% for earnings beats. The above-average number of earnings beats is encouraging, but there is a potential explanation. First quarter earnings estimates for the S&P 500, Nasdaq 100, and Russell 2000 were revised lower throughout the first quarter. These downward revisions may have set the bar too low, leading to more companies beating expectations. Supporting this thesis, estimates were revised higher over the past month as more companies reported first quarter results. The upward revisions, combined with the 78% beat rate, suggest Wall Street analysts may have been too negative going into the quarter.

Data collected by the U.S. Bureau of Economic Analysis show that consumer spending, as measured by Personal Consumer Expenditures, continues to increase. This is important as the consumer historically accounts for approximately 70% of U.S. economic activity. However, commentary from other companies suggests activity may be peaking. A large overnight shipping company reported declining package volume, which may suggest consumer spending fell as the quarter progressed. Conversely, a large heavy equipment maker reported flat backlog numbers, potentially indicating that construction, mining, and drilling activity remains elevated but may be peaking. The mixed messages explain why analysts were cautious entering earnings season. Our view is earnings will remain in focus this year as the market deciphers how higher interest rates will impact the economy.

Many financial-related headlines and market commentators appear to project a “risk off” tone with respect to the investing outlook, due to uncertainty around rate hikes, the debt ceiling and bank stress. A risk off stance doesn’t mean the stock market is heading for a crash, or that the economy is heading for a recession. In our view, this indicates investors believe the risk/reward is not favorable relative to increasing risk as we reach the midpoint of 2023.

While not in a recession, the U.S. economy has entered a period of decelerating growth. Labor markets and consumer spending remain the largest sources of strength. We do recognize the downside risks to year-over-year economic growth and while business spending appears to be slowing, we do not believe it will collapse.

Please reach out if you would like to discuss further,

Dennis P. Barba, Jr.
CEO & Managing Partner

Michael P. Finkelstein, CFA

Important Disclosures: The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The information contained herein is based on technical and/or fundamental market analysis and may be based on data obtained from recognizable statistical services, issuer reports or communications or other sources believed to be reliable. However, such information has not been verified by us, and we do not make any representations as to its accuracy or completeness. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. CAR-0523-03776

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