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WEEK AHEAD

February 12-16, 2024

Tactical Signal 9

Continuing the upward trajectory of the equity market, bolstered by robust technical momentum signals, the past week showcased a solid foundation of positive earnings and forward guidance. Our strategic indicators remain firmly positioned in a favorable stance, indicative of ongoing strength and resilience in the market (100%).

The major averages continued to exhibit strength, reaching record highs in the past week on validation of positive earnings fundamentals, strength in consumer spending, and durable employment trends. Hence, the S&P 500 and Nasdaq Composite recorded YTD gains of 5.52% and 6.58%, respectively, with the assistance of 6 of the Magnificent-7 stocks pushing weekly gains above the S&P 500. But unlike 2023, there is market breadth on the week's gains of +1.4% and +2.3% were exhibited more broadly also by Walt Disney (+11.59%), Eli Lilly (+10.86%), and Berkshire Hathaway (+1.95%).

Walt Disney's resurgence under Bob Iger's leadership was fueled by a revitalized focus on streaming services, a noteworthy 50% surge in dividend payouts, and an expanded collaboration with Taylor Swift following the success of her recent concert film. Eli Lilly, now a titan in the pharmaceutical domain, reported a remarkable 28% year-on-year revenue surge driven by the success of its blockbuster weight-loss drugs Zepbound and Mounjaro, cementing its position as a top-ten holding in the S&P 500 with a market capitalization exceeding $700 billion. Meanwhile, Berkshire Hathaway scaled new heights, bolstered by its strategic investments in Apple and Amazon.

Given the Federal Reserve's unwavering commitment to maintaining a restrictive monetary policy stance amid the nation's advancing economic landscape, the Bloomberg US Aggregate index witnessed heightened volatility, registering a modest decline of -0.82% for the week, propelled by escalating yields. Long-term US Treasuries experienced notable downward pressure, with the 20-year and 30-year yields widening by +15 basis points each, culminating in yields of 4.48% and 4.37%, respectively. Notably, the latest national average APR for a 30-year fixed mortgage surged to 7.3%, signaling potential headwinds in the housing market.

In the coming week, markets will continue to mine through companies reporting earnings and heightened concern for regional banks given Fed Chair Powell's "60 minutes" interview last Sunday regarding regional bank consolidation and concern for their concentrated real estate holdings. On the economic front, inflation reports on Tuesday and manufacturing reports on Thursday to help affirm the current trend.

"Algebra is like sheet music. The important thing isn't can you read music. It's can you hear the music."

– Oppenheimer Movie written and directed by Christopher Nolan, 2023.

Earnings, earnings, and if all else fails, earnings…

EARNINGS SEASON

2023 ended with a bang, and despite the rise of the magnificent 7, there was a broadening in the markets, especially in the fourth quarter. On the surface, it seemed that the FED's pivot to a more dovish stance marked the 2023 bottom, and there was a dramatic change in sentiment and belief around a potential "soft landing" for the economy. 

One may even call it a "risk-on" moment, much different from the recessionary fear mantra that plagued the markets since the 2022 peak, though recessionary fears and lower rates are good for long-term growth stocks.

However, today, we see evidence that there may be more to this recent rally, which comes in earnings.

In Factset's recent report, John Butters delivers the data behind this recent earnings season for Q4 2023. In the writing of the Feb 2nd Earnings Insight Report, it was found that after 46% of the S&P 500 companies reported, 72% reported positive EPS surprise, and even more impressive was that still 65% of the companies also reported positive revenue surprise.

This doesn't sound like an economy suffering whiplash from a FED slamming on the economic brakes over the last few years.

We also find that the reported YoY growth rate for Q4 S&P500 was 1.6%, and notable was that a year ago, this Q4 growth rate was forecasted to be negative!

A deeper dive shows that the real disappointment came in the Financial sector, particularly in the banking sector. A blinking light regarding potential issues still lingering in the banking sector. Can you say NYCB? In the report, the decline in Financial sector earnings was noted to be down over 19%. Ouch! However, across the other ten sectors that comprise the S&P 500, earnings were much better than expected by over 7% above estimates.

Higher than-expected growth rates in Information Technology, Energy, Healthcare, and Consumer Discretionary sectors led to $16 billion in increased earnings. The last sector is notable due to the large portion of the GDP from consumer consumption, roughly 67%.

Some key names that had significant surprises were Apple, Microsoft, QCOM, and Intel, but also names like Chevron, Exxon, Mobil, and Pfizer.  Amazon reported $1.00 vs. 0.79 and represented a Consumer Discretionary sector that boasts an earnings growth rate of almost 30%.

Despite this, there are cautionary signs as more companies have lowered EPS guidance going forward, and the P/E ratio is above the most recent 5-year average. However, this recent increase in earnings makes this high of 20x Forward P/E still lower than the Forward P/E at the Jan 3, 2022, market high of 21.4x.

The market has priced in this earnings news quite well, if not even forecasted it. Over recent earnings cycles, we have seen that these earnings surprises and estimate revisions play a bigger role in stock price performance. Companies are seriously rewarded or punished based on any surprise in the earnings and revenue reports. This indicates being well into an economic cycle rather than an inflection point. This seems reasonable given all the FED action, the resulting impact, and corporate and consumer response, and now, we have a market that awaits a confirming trend in the economic data. We'll play the FED waiting game, but at least we breathe a sigh of relief this earnings cycle.

Econ Reports Feb 12-16
Indices as of 2/9/24

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

 

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