Broker Check

Was January Real? The Next Two Weeks Will Be Telling

| February 06, 2023

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Even with markets opening 2023 on a tear, many questions remain unanswered amidst mixed economic data and earnings reported so far. However, when taken together, the entire package is being bought by investors as a “soft landing” narrative.

To be clear, much still depends on the Federal Reserve’s actions and tone from last week as well as if the earnings trough is truly in or not. As of now, the market is betting on Fed dovishness and the earnings low point having occurred in the last quarter of 2022 or the first quarter of this year (i.e., right now).

The market’s dovish bet regarding the Fed seems to be significantly reliant on the most recent personal consumption expenditures (PCE) inflation report. That showed a 4.4% year-over-year read on core PCE, which has continued to decline since November 2022:

That data in conjunction with the bet that the earnings trough is in and that improving top- and bottom-line earnings results will emerge next quarter show promise for the latter part of the year. As we've discussed, the market is forward-looking, and stock prices usually rally in anticipation of good news well before the numbers justify such rises. If the macro picture is indeed set to improve to the extent the market thinks it is, this is all well and good.

Diving in a bit, we can see the market improvement in the S&P 500’s 6.2% January rise and the fact that the Nasdaq had its best January since 2001, rising 10.7%. This strong start to the year is a direct result of money aggressively flowing into markets.

For proof we turn yet again to MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” investor activity. The rise continues:

Why is it continuing to ascend? You don’t need to look much farther than “big money” buying of stocks in January along with minimal selling:

The “big money” buying in January focused on smaller stocks, which indicates an appetite for growth:

Continuing our deeper January dive, it’s interesting how the sector seeing the most buy action is 2022’s redheaded stepchild – technology:

The “big money” is betting on cyclical growth and the earnings trough already being priced in. That’s even clearer looking at just a few recent big days at the end of last month. Tech picked up significant steam, being bought at a 10% greater clip than its Jan. 1-26, 2023, average:

Even last week we saw this trend exemplified in the beaten-down semiconductor space. For instance, Advanced Micro Devices (AMD) reported better-than-expected earnings and beat analyst expectations on revenue too.

These actions are a complete reversal from the trends in 2022, when energy ruled. The tech rebound is prevalent in software and semiconductor firms, which were crushed last year. This tech buying trend will only be profitable if the market is correct and the earnings trough is in.

You may think the technology rebound is a recent phenomenon. And while it is to some extent, looking at the data shows that the Nasdaq 100, a collection of the 100 largest and most traded U.S. stocks on the Nasdaq exchange, had its price trough in early November 2022.

Since then, this collection of household names has flourished. Our friends at MAPsignals did the work to show how the top 25 stocks in the Nasdaq 100 have performed since Nov. 3, 2022:

To be clear, we’re not suggesting the entire tech world is healthy and raring to soar. Proper homework and research on new opportunities remain critical. That said, being methodical and choosing our spots carefully seems to be a winning strategy, especially during earnings season.

Coming back up to the surface, the moves we just covered have produced a powerful shift. Still, investors must trust their due diligence and avoid the broader noise.

It wouldn’t surprise to see the market take a breather and give back some of the recent gains. But calls for such moves are predicated on earnings margin erosion that would lead to a deep slide in S&P 500 earnings by midyear. Thus, the next two weeks are going to be key to see if support for the January rally is real.

As the below chart shows, the current forward consensus for S&P 500 earnings per share (EPS) is $230. That figure will be scrutinized over the next couple weeks. At that point, about 85% of the S&P 500 firms will have reported earnings, and we’ll know if the EPS figure is reliable.

The current forward price-to-earnings ratio for the S&P 500 is 17.8x. In our opinion, that’s fairly valued on a historical basis for the S&P 500 to be trading right around 4,100. If the skeptics are correct and the earnings trough is not in, a fair value would be closer to 3,600 and an EPS figure of around $200 or $210. But if the bulls are right and EPS come in around $230 or $240, there is room for the S&P 500 to climb as high as 4,800, which would expand the price-to-earnings ratio to roughly 20x on rising optimism.

Currently, the market favors the latter outcome. So, we’ll be watching earnings closely to see which camp is correct and if there’s strong support for the January runup as a floor for future growth. The next two weeks will be telling.

*Daniel Milan owns AMD in personal accounts.

Securities sold through CoreCap Investments, LLC.  Advisory services offered by CoreCap Advisors, LLC.  Cornerstone Financial and CoreCap are separate and unaffiliated entities.

Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.