Earnings season off to a good start, but there is dispersion

We are early in earnings season, with only 66 of 500 S&P companies reporting, but 77% of companies are beating. They are beating by an average of 7.1%. Growth has come in at an average of 5.7% versus an expectation of 0.5%. Margins are improving. Despite generally good results, the stock reactions have been mixed. A lot of that is a function of positioning and how the stock performed coming into the quarter. Companies such as JP Morgan, Netflix, Taiwan Semiconductor, reported good results but saw a significant sell-off in their stock. Companies like UnitedHealth came into the quarter weak, reported mixed results, and saw their stock rally. So far, the standout sector this quarter has been the airlines. Both Delta and United reported terrific results and guidance and have seen their stocks fly.

• Earnings season is off to a good start, tracking better than expected
• Higher inflation and strong economic growth have helped boost the top-line
• Companies have spent the past couple of years reducing costs, preparing for a recession
• Cost reductions and productivity boosts have driven margins
• Stock reactions have been mixed, depending on how the stocks came into the report
• Taiwan Semiconductor reported that AI demand remains strong
• Demand for travel continues to be strong
• Big banks have been able to weather higher rates and are taking share

Federal Reserve walks back expectations

There were eight Federal Reserve speakers this week, and the common theme seemed to be trying to talk back expectations of rate cuts this year. Most notably, the Chairman, Jay Powell, spoke about recent inflation data and how this was confirmation that they do not need to move too quickly to cut rates. Later in the week, another Fed President, John Williams, mentioned that there was even a probability that they would have to raise rates from here. This is in stark contrast to what we heard from the Fed at the end of last year when they all but sounded the “mission accomplished” signal.

• Earlier this year, the Fed had signaled 3 rate cuts for the year, and the market began pricing in closer to 6-7
• The market has changed significantly, given the higher-than-expected inflation and employment data
• The 2-yr bond market has generally been one step ahead of both the Fed and the prediction markets
• The 2-yr has gone from 4.25% at the beginning of the year to close to 5% today, signaling little to no cuts in the near future
• Now Fed officials seem to be confirming that recent inflation data means rate cuts are not coming as quickly as they initially anticipated
• John Williams even mentioned rate hikes in his speech this week
• UBS came out this week with a note that said they may need to actually hike to 6.5% from here, something that was unthinkable even a few months ago

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Middle East conflict escalates

Last weekend Iran launched a strike directly against Israel, the first time a foreign nation has done so against the country since 1991. The attack was widely and transparently projected, allowing Israel and its allies to prepare. Most of the 330+ projectiles, including drones and missiles, were intercepted by Israel, the US, UK, France and Jordan. While there were thankfully no casualties, this was seen as an escalation of the initial Hamas invasion of Israel in October. Israel responded this week by striking specific targets in Iran.

• Markets reacted to both retaliations negatively, but rebounded when it became clear the actions seemed to be designed to be highly targeted and didn't result in many casualties
• Last weekend, crypto being the only market open, sold off on the news of Iran’s strike
• By Monday morning, however, markets calmed down and were trading in line with prior levels
• The same could be said for the Thursday night strike back from Israel
• While stocks had another bad week, it seems to have been tied more to interest rates and earnings than the higher level of geopolitical tension
• While both sides seem to want to keep this from escalating further, the uncertainty will continue to bring volatility to markets for the foreseeable future

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