Earnings Trump the Fed
"That's the biggest gap in sports, the difference between the winner and the loser of the Super Bowl."
— John Madden
Super Bowl week brings plenty of press conferences, breaking news, and pundits opining on what will happen – not unlike what we experience every week in the financial market. This past week was a prime example.
First off, the Fed did what was expected. The Federal Reserve's policy committee unanimously voted to increase interest rates by a quarter point as it continues the fight against inflation. The federal-funds rate target is now in a range of 4.5% to 4.75%. The Fed seems encouraged by the recent reduction in inflation, but Chairman Powell said it is premature to declare victory or “to think that we’ve really got this.” It was the smallest hike since March of last year and expectations are they will raise one more time before taking a pause.
Markets had a modest positive reaction to the news and the corresponding press conference. However, the markets would see a greater swing just a few hours later when Facebook parent company Meta Platforms released earnings Wednesday afternoon. Meta shares were up 23% on Thursday as the company pointed to early signs of improvement in their business both on a revenue and costs front. This came on the heels of Exxon Mobil reporting a record $56 billion profit in 2022, while Chevron’s $35.5 billion profit was also its highest ever. Are we about to see an earnings renaissance? Not likely, especially as the chart below shows the S&P 500 will experience its first quarterly decline since COVID.
The Fed has been the main driver of market moves over the past year. Any minor utterance or perceived change in Fed policy has resulted in major ripples in the stock and bond markets. However, this may be changing for 2023 as investors will be monitoring corporate guidance for any signs that a recession is coming; or as in the case of the positive news this past week, that companies are improving their outlook.
The Nasdaq has had one of its best starts in 20 years and is up 16.6% year to date, small cap stocks as measured by the Russell 2000 have increased 13.6% while the S&P is up 8.9%. These positive numbers may reflect that the Fed is close to ending its tightening phase and that the corporate earnings outlook is starting to improve. Equity markets may be too optimistic about those prospects and our view is not to materially increase risk in portfolios after these strong moves. There are likely to be missteps along the way to a 2% inflation rate and an economy continuing to grow.
As for the big game next week, the investment team is not aligned on our thinking. I’m a long time Chiefs fan but our Investment Analyst Brandon Krantz will be rooting for the Eagles! I guess being diversified in our views means one of us will be happy on Monday February 13.
Source: The Wallstreet Journal & FactSet