/ January 15 / Weekly Preview
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Monday:
N/A
Tuesday:
NY Empire State Manufacturing Index (-9 exp.)
Fed Waller Speech
Wednesday:
Retail Sales MoM (0.3% exp.)
OPEC Monthly Report
Thursday:
Building Permits (1.48M exp.)
Initial Jobless Claims (205K exp.)
Friday:
Michigan Consumer Sentiment (69 exp.)
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Monday:
N/A
Tuesday:
Goldman Sachs GS
Interactive Brokers IBKR
Morgan Stanley MS
Progress Software PRGS
Wednesday:
Kinder Morgan KMI
Alcoa AA
Charles Schwab SCHW
U.S. Bancorp USB
Discover Financial Services DFS
Thursday:
Fastenal FAST
J.B. Hunt Transport JBHT
KeyCorp KEY
PPG Industries PPG
Friday:
Travelers TRV
Ally Financial ALLY
Huntington Banc HBAN
SLB SLB
State Street STT
Q4 Earnings Season Begins
The S&P 500 index has failed the initial test of the New Year, providing negative returns over the first 5 trading days of January. The failure implies potentially lower returns for the rest of the month and for the full year. Stats compiled by Stocktraders Almanac show that the median 1-year returns for the S&P 500 when the first 5 days are negative are just 1.8% (compared to 15.9% when the first 5 days are positive).
This striking disparity is well documented and has roots in investing psychology and putting “money at work in the New Year”. The last yearly barometer that can “save” the sluggish start for 2024 is the January effect, which has an unusually high accuracy:
“Here’s what we found going back to 1938. There were only 13 major errors. Using these 13 major errors, the accuracy ratio is 84.9% for the full 86-year period. Including the 9 flat year errors (less than +/– 5%) the ratio is 74.4% — still effective. For the benefit of the skeptics, the accuracy ratio calculated on the performance of the following 11 months is still solid. Including all errors — major and flat years — the ratio is still a decent 67.4%.
Now for the even better news: In the 52 up Januarys there were only 4 major errors for a 92.3% accuracy ratio. These years went on to post 16.2% average full-year gains and 11.6% February-to-December gains.” - Stocktraders Almanac
For now, the market remains rangebound, on a sell-signal and still in an overbought condition. Technical levels are moving up, and the good news is that SPY has successfully tested the 20-Day Moving Average that acted as support last week, which indicates that the bullish trend remains intact.
While downside should be well contained at $458 (-3.91% lower, at the 50-DMA and R2), there are 2 scenarios we can consider for determining the near-term upside. Either this is non-existent, as seen in the chart below…
…or the market has a bit more leeway to the upper trend-line if we allow for a more aggressive slope (15%) and higher price target ($510). Upside would come in at $489, +2.58% higher than the last close price.
The next major catalysts for the market are of a fundamental nature, as Q4 earnings season gets underway in earnest this week.
Q4 Earnings Season Insights
As is always the case, Wall Street analysts have cut estimates for Q4’2023 in the last couple of months. This practice of continuously lowering estimates as reporting season approaches has become standard practice in finance, so that it can enable most companies to “beat expectations”. Since 2000, roughly 70% of companies have always registered a “beat” despite prevailing economic conditions. Needless to say, that number would be closer to 50% if analysts were held to their original projections.
At this date, around 6% of S&P 500 companies have reported results, and the season is off to a weak start. Negative EPS surprises reported by companies in the Financials sector on Friday (Bank of New York Mellon, Bank of America, Citigroup) are pointing to a Year-over-Year decline in EPS for the index. The blended earnings decline comes down to -0.1% at the moment.
Of the 7 companies that have issued guidance for Q1 2024, 4 have issued negative EPS guidance and 3 have issued positive EPS guidance.
Of course, 94% of constituents are yet to report, but with the broad market trading at relatively expensive levels, one has to wonder what value is left to harness. Positive results appear to be almost fully priced in. For the record, here are current analyst expectations:
For Q1 2024, analysts are projecting earnings growth of 5.7% and revenue growth of 4.0%.
For Q2 2024, analysts are projecting earnings growth of 10.2% and revenue growth of 5.0%.
For Q3 2024, analysts are projecting earnings growth of 8.3% and revenue growth of 5.2%.
For Q4 2024, analysts are projecting earnings growth of 19.8% and revenue growth of 6.0%. For CY 2024, analysts are projecting earnings growth of 11.8% and revenue growth of 5.5%
For CY 2024, analysts are projecting earnings growth of 11.8% and revenue growth of 5.5%.
We’ll see how these projections hold up once more companies report. The average Price Target for the S&P 500 has climbed recently, as more analysts have revamped Year-End targets higher, to around 5.208 (or roughly 9% higher).
Our own analysis published in November 2023 paints a more cautious picture, leaving around 6.6% of potential upside if everything goes well.
In the short term, as the media inevitably reports “earnings beats” we do expect the price action at the index level to remain supportive. The only issue is that market gains have far outsrripped earnings growth so far. Investors are willing to pay more for less earnings growth in anticipation of it being made up in the future.
Yet according to the Citi Surprise index, the anticipation (and hope) of higher earnings might be misplaced. With economic growth slowing, the risk of disappointment is not negligible.
An index that is trading in a technically aligned way with current fundamentals is the iShares Russell 2000, represented by the IWM ETF. Last week, IWM has tested and confirmed resistance to the upside and continues to trade sideways in the same range established in early 2022. We expect more consolidation here as well.
In the meantime, it is the setup for bonds that becomes more attractive, as equity valuations are simply expensive. TLT has come off overbought conditions recently and is completing a consolidation pattern. Given the obvious downside pressure on yields as the Fed is expected to cut rates more or less aggressively, the case for owning bonds remains compelling.
Bonds may as well outperform the S&P 500 index on a risk adjusted basis in 2024, considering that the risk-free 1 year yield currently stands at 4.66%. Adding the equity risk premium to that (4%), stock investors should expect at least 8.66% returns in order to be adequately compensated.
Our Trading Strategy
At the current juncture, the market is incredibly well balanced. Q4 has gotten off to a sluggish start, but this has barely made a dent in the overall risk appetite of investors. Technicals in the equity market remain strong, as support has been successfully tested for the S&P 500. There are no reasons to get overly defensive or cautious right now.
For many stocks, especially larger caps, a lot of the positives have already been priced in. Overall, the market offers a very slim margin margin of error, meaning that in case of disappointment, there is more downside than upside available. We suspect that the following weeks will offer a better risk-reward proposition in terms of adding to stock exposure.
The cooling-off in bond market is healthy and opens up the possibility to extend the duration in the treasury side of the portfolio. Until we get more data out of the current earnings season, the name of the game is “HOLD”.
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