Published April 12, 2024
With investors in between earnings this week and last the focus has been on the outlook for future interest rate cuts. Inflation data continues to come in a tick hotter than expected while economic growth remains solid. Below we check in with private capital commentary on recent employment trends and the outlook for upcoming earnings.
“While many await a slowdown, the U.S. economy laughs and shifts into a higher gear. Last week’s surge came as a result of Friday’s monthly jobs data which showed accelerating job production and tepid wage growth. Both the payroll and household surveys contributed strong numbers. March’s job creation was led by part-time jobs as industries like leisure/hospitality, construction, retail and healthcare amounted to almost 2/3’rds of the new jobs. And if you look at the demographically adjusted labor force, the U.S. is back to running at past peak employment levels. So even if employers were looking for full-time workers, are they even available?
As the jobs picture continues to improve, the forward data on transportation numbers and manufacturing orders are also shining brighter. This pickup is causing fits in the treasury bond market, while also pushing investors to consider investing their equity portfolios outside of the Mag 7. Cyclical stocks continue to outperform defensives. And value stocks are attempting to get a leg up on growth stocks. Ditto for small-cap and international equities. Maybe the upcoming earnings period will give non-Mag 7 companies a platform to talk about their improved outlooks and lower valuations. We will find out beginning this week as the big banks and a handful of other S&P 500 giants lead the discussion about Q1 earnings and their outlooks for 2024. In addition to earnings, the big CPI and PPI inflation readings will drop mid-week.
Friday’s jobs numbers were fantastic…
Accelerating job growth and year over year wage growth of +4.1% which is running above the +3.2% inflation rate.
NFP = Non-farm Payrolls
AHE = Average Hourly Earnings
@ernietedeschi
Welcome to full employment…
@ernietedeschi: Adjusted for aging, employment and labor force participation rates are extraordinary, around 1999-2000 levels, likely ranking among the highest in US history. This is truly about as close to full employment as the US has managed to get outside of wartime mobilization.
COVID retirements and workforce exits nearly crippled the U.S…
If not for positive U.S. immigration, the U.S. economy would have been significantly impacted by labor imbalances and wage inflation the last four years. As a result, America now has one of the strongest economies in the world.
Big influxes of new migrant workers can ease the risk of a damaging wage-price spiral by giving employers a greater pool to recruit from. And at present, it looks as though labor shortages would feel severe (and hence the upward pressure on wages and prices would be more intense) if it were not for a sharp increase in the number of foreign-born workers looking for a job. The figure of native-born workers in employment is still slightly below the level from the eve of the pandemic; employment of the foreign-born has increased by more than 10%.
Don Rissmiller, chief economist of Strategas Research Partners, points out that the US has been “significantly boosted by additional labor supply (a country with more people has more GDP),” and that this has offset ageing demographics. He adds: “This could be a politically unstable path (especially given the US election in November), but it counts as growth in the meantime. ‘Big immigration’ helps explain the resilience of US activity against the backdrop of more sluggish economic data abroad.”
This Q1 should be the low in margins for 2024 and guidance for future quarters will be closely watched…
S&P 500 margins are expected to sequentially trough in 1Q. Bottom-up consensus expects the S&P 500 will post 10.9% net margins in 1Q, a 28 bp sequential contraction but a 2 bp yr/yr expansion. Energy, Materials, and Health Care are each expected to post yr/yr margin contractions of greater than 100 bp. The 10 S&P 500 stocks with the largest market caps are expected to expand margins by nearly 400 bp year/year while the remaining 490 firms in the index will see margins fall by 57 bp.
Goldman Sachs
As economic strength broadens in 2024, the non-Mag 7 companies will have a good earnings story to follow…
A resilient economy and strong consumer demand are expected to fuel a rise in earnings growth for S&P 500 companies for a second straight quarter following three straight quarters of profit contraction. And strong margins from big tech firms will likely be a key driver.
Profits for the seven biggest growth companies in the S&P 500 — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Nvidia Corp., Meta Platforms Inc. and Tesla Inc. — are on course to rise 38% in the first quarter, according to Bloomberg Intelligence. When excluding them, the rest of the index’s profits are anticipated to shrink by 2%.
Wall Street expects this trend to reverse as the year progresses. In the fourth quarter, those seven firms are expected to post earnings growth of 15% compared with 18% for the rest of the S&P 500, according to data compiled by David Kelly, chief global strategist at JPMorgan Asset Management.
Bloomberg
Market Update
Investors looked this week to more inflation data and the first batch of quarterly earnings reports. Monday brought rising interest rates but little reaction from stocks as the indexes closed flat. Investors were more optimistic about rates Tuesday with yields falling st. But stock indexes remained flat as market watchers awaited Wednesday’s inflation report. The report on consumer prices came in higher than expectations leading to a -0.9% decline for stocks. Yields on the 10-year note climbed to their highest levels in six months. But a favorable reading on wholesale prices Thursday brought yields back down, sending stocks up to a new record high on the Nasdaq as Apple zipped +4% higher. A broad retreat Friday undid Thursday’s rise as bank earnings failed to encourage investors. The nation’s leading bank, JP Morgan, fell -6.5% giving up six week’s worth of gains. While banks generally beat earnings expectations, their outlooks were muted as the impact of higher-for-longer interest rates dampen profit prospects.
A topsy-turvy week found the S&P 500 (SPY) with its second straight weekly decline. The broad market index slipped -1.46% while the Nasdaq 100 (QQQ) fell a slight -0.50%. Smallcap stocks (IWM) reacted badly to the jump in interest rates with the index falling -2.82%.
Warm wishes and until next week.