Last week was the busiest of earnings season, with 106 S&P 500 companies reporting. The S&P 500 rose 1.4% for the week, driven primarily by earnings and the Magnificent 7. The 10-year Treasury yield was fractionally lower at 4.0%. Helped by robust earnings growth from Meta Platforms (META), Microsoft (MSFT), and Amazon.com (AMZN), the Magnificent 7 led the way with a gain of 4.9%, while the equal-weighted S&P 500 lagged at 0.5%. The Magnificent 7 consists of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA). This week’s earnings season remains packed, with 104 S&P 500 companies scheduled to report.
Last week, monthly job growth was well above expectations, with nonfarm payrolls growing by 353 thousand and the unemployment rate falling to 3.7%. While the household employment growth looks weak, the annual population adjustment makes this month’s measurement misleading.
The workweek plunged 34.1 hours, typically a sign of labor market softness, but it was likely due to bad weather in January. Relatedly, year-over-year hourly earnings were higher than expected at 4.5%, but part of the higher print was due to the reduced hours.
The conclusion from the jobs report is that economic growth remains robust, and the wage growth from this month’s report isn’t as significant a threat to bleed into overall inflation as it might seem on the surface. The Atlanta Fed’s estimate of first-quarter GDP growth rose to 4.2%. In addition to the better economic outlook, Fed Chair Powell’s comments after last week’s meeting signaled that a March cut was highly unlikely. As a result of the continuing above-expected economic growth, the odds of a March short-term interest rate cut from the Federal Reserve plunged to around 20%.
While the market probability of a rate cut in May declined to around 70%, roughly mid-year is still the odds-on favorite for the first easing.
Treasury bond yields have come off their recent lows but have not soared due to future inflation expectations remaining muted and Federal Reserve rate cuts still being expected in 2024.
After last week’s earnings reports, the season is nearly half done. As expected, earnings growth has improved markedly after the disastrous start by the banks.
According to FactSet, the healthcare, energy, consumer discretionary, and technology sectors were the most significant contributors to the vast improvement in the headline growth rate last week.
Among the companies upcoming this week are McDonald’s (MCD), Eli Lilly (LLY), Caterpillar (CAT), Uber Technologies (UBER), and Walt Disney (DIS).
Sales growth is closely tied to nominal GDP growth, combining after-inflation economic growth (real GDP) with inflation. With nominal GDP growth at 5.8% year-over-year for the fourth quarter, topline revenue growth for companies has some tailwinds. After another boost last week, sales growth is nicely higher than expectations going into the earnings season.
After the exceptional performance last week, the blended earnings performance has reached expectations at the end of the quarter for the first time this season. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at 1.6% year-over-year, equal to the expectations at the end of the quarter.
Despite the poor performance of Alphabet (GOOGL) and Apple (AAPL) last week, the Magnificent 7 leads the market with a year-to-date total return of 9% versus 4% for the S&P 500. While the first rate cut from the Fed is delayed by resilient economic growth, the expectations of better corporate profits and tame inflation have continued to boost stocks. In addition, overall fourth-quarter earnings for the S&P 500 have improved now that the banks are in the rearview mirror. The postponement of any rate cuts has taken a toll on some of the interest rate sensitive sectors of the market, like banks, utilities, and real estate. Investors should continue to expect better year-over-year earnings growth for the rest of the earnings season. This week is relatively quiet on the domestic economic release front but is the second busiest week of the earnings season.