We’ve hit the midpoint of quarterly earnings season, so it’s agood time to reflect on what’s occurred thus far. For the S&P 500*, the number of companies reporting positive earnings surprises beats recent averages, though the magnitude of those surprises is lagging historical performance.
Thus far, 51% of S&P 500 companies have reported results and they’re handily beating earnings per share (EPS) estimates, though not by as much:
As of this writing, six of the 11 sectors reported earnings growth, led by consumer discretionary and communication services:
Turning to revenues, companies are bringing in more money than the 10-year average, though not as much as in the last five years.
The same is true for the spread between expected and actual revenue – we’re in between the five- and 10-year averages:
The revenue surprises are led by the consumer discretionary, industrials, and communications services sectors:
We also want to look ahead at earnings growth projections for the second half of 2023, especially considering that we’ve viewed the second quarter as the earnings trough. Analysts are projecting earnings growth of 0.2% in the third quarter and 7.5% for the fourth quarter. If that holds true, we’d reach aggregate earnings growth of 0.4% for 2023.
These earnings results are not great, but they’re not bad either. They’re right in the middle of the road and seems that we’ve avoided another feared “earnings apocalypse.”
Late Summer Dips
Many investors look at August as the month to lose money. From a seasonality standpoint, that’s somewhat accurate. Last year the S&P 500 fell 4.2%inAugust (right in the middle of the market’s downward spiral).
Let’s keep in mind August is when many European and U.S.-based investors take time off. Since 1950, Augustaverage returns have only been 0.01%, with anaverage drawdown of -3.2%. That implies a 150-point downside volatility risk to the S&P 500:
Historically, when the S&P 500 is up 15% through July, the average drawdown inAugust is -3.5%:
To be clear, this hardly means to shift to cash. Rather, it’s a good time to sit and do nothing. From a short-term technical standpoint, seasonality could cause a drawdown of 100-150 points for the S&P 500:
But we think such a plunge would be quick, especially since there’s so much cash on the sidelines right now. Ultimately, we expect August to be noisy. It may be easiest to just relax since we’re constructive for the rest of 2023.
Last week we received a couple of economic datapoints that will matter in August: the Job Openings and Labor Turnover Survey (JOLTS) report for June, and the July Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI).
The JOLTS report showed job openings fell to 9.582 million versus the Wall Street consensus expectation of 9.6 million:
And the ISM Manufacturing PMI rose to 46.4 versus a reading of 46.0 last month:
Both these figures are tame on inflation and thus support our view that the Federal Reserve’s rate hiking cycle is nearly done (or should be done already). The market viewed these results as tame as well since the September 2023 federal funds rate futures odds of a rate increase did not spike, but actually fell to 17%:
We’ll next focus on the U.S. Bureau of Labor Statistics jobs report and the July consumer price index report. In the meantime, seasonal volatility will probably induce some upset stomachs for investors, though it will pass as the end of the year continues to hold promise.
Longer-Term Outlook
As our readers know, back in October the data showed an oversold market and a pending rally likely to be led by growth sectors. Fast forward to today and that narrative has played out. This data-led approach, rather than listening to news headlines, ensured that our investment decisions did not cause us to miss out on monster returns.
But now the data is telling a mixed story.
Let's address the less favorable news. As mentioned above, the white-hot technicals and seasonality (see below) are about to collide. That usually spells out a short-term market pullback.
Next, MAPsignals’ trusty Big Money Index (BMI), which is a 25-day moving average of “big money” stock buys versus sells, is officially overbought:
As we've said before, being overbought isn’t necessarily bad. Volatility has the potential to arise when the BMI begins to fall from overbought territory. For now, let’s enjoy the ride and watch for a falling BMI.
On the more positive side, stocks have been accelerating due to immense buying and hardly any selling:
Most importantly, we’ve seen quality stocks (not the 2020 junk) getting bought. Additionally, there’s been smooth, balanced buying in growth sectors like tech, discretionary, health care, industrials, and financials:
Recently the weakest sectors are not being sold, which is a reliable indicator that there is potential short-term volatility around the corner. No selling usually corresponds with an overheated market.
Nothing lasts forever. It’s rare to have only buying and no selling. It’s even rarer for it go on for an extended period – it’s never happened that it happens forever.
So, a pullback based on technicals is lining up with poor seasonality. Investors may not like it, but this is healthy and necessary.
That said, if we’re going to use history as a guide in the near term, we should use it for longer periods too. Late-year seasonality is great for stocks, and we believe the market could bounce back from consolidation and rocket through the last quarter of 2023.
Our message for the next couple of months is to enjoy the rest of the summer. Not much is happening in markets. The data and history say to expect choppiness, but things will awaken in the fourth quarter.
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*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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