Mixed Market Signals
More market-moving news for investors to ponder this week as corporate profit reports keep rolling in and the Federal Reserve holds a policy meeting midweek.
Both have big potential to impact where stocks go from here.
On the earnings front, the watchword continues to be so far so good. About half of S&P 500 companies have posted quarterly results, and so far actual profits are exceeding expectations by 77%. An above-average “beat rate.”
Not So Fast — There’s Another (Not-So-Good) Surprise
On average, companies are reporting profits 5.3% above analyst estimates, which were also above average. Surprisingly, even if the positive surprise trend continues, overall S&P 500 earnings are still on track to decline about 2% over the same period last year. This would be the first profit drop since 2016.
The sectors in the S&P that are reporting year-over-year profit growth are led by health care and utilities, both defensive sectors.
An additional 164 S&P 500 companies report this week, so by the time it’s over we will have a very good handle on the final number. We’ll also have good insight into next quarter’s profit estimates.
Against the head wind of slowing earnings, we have the tail wind provided by a suddenly dovish Fed with interest rate hikes for now off the table.
That’s why this week’s FOMC meeting is also a key event for investors.
Hard Pivot to a Dovish Fed Could Mean This…
You’ll recall late in 2018 the Fed was hell-bent on raising interest rates, telegraphing five more rate hikes were possible in 2019. Then stocks took a nose dive at year-end, and in January a repentant Fed promised to be “patient” with any further rate hikes.
Of course what the Fed says and what the market chooses to believe can be two very different things.
The fed funds futures market provides a real-time glimpse of what investors collectively think the Fed will do. Expectations (blue lines shown above) shifted dramatically from three more expected rate hikes late last year to the prospect of the Fed cutting interest rates twice in 2019.
That’s a very extreme sentiment swing!
With the Fed’s dovish pivot in January, it now has a very tough act to follow.
The Fed Walks a Fine Line
Economic data have improved marginally since then, and the Fed must now walk a very fine line.
They don’t want to sound too cautious on the economy’s prospects but can’t sound too upbeat either, dashing market expectations for lower interest rates.
The Fed shifted rapidly from rate hike mode in December 2018, when they likely hiked for the last time, to “on hold” in January. They could just as quickly shift to rate-cutting mode in the months ahead.
That said, I doubt they do. Unless things get really ugly.
Either way, there’s a growing risk the Fed will disappoint some folks in one way or another. This in turn could be quite a shock to complacent financial markets.
But as savvy investors you’ll know to keep calm and stay invested, because there’s no way the Fed can please all investors all the time!
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch