Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, notes the market’s lackluster response to a so-far very strong first quarter.
After improving from its early-April lows on dampened U.S.-China trade tensions, the S&P 500 has pulled back to its 200-day moving average. We continue to believe that the S&P 500 is likely range-bound (levels near 2600-2800) for the short term as headwinds from trade negotiations and interest rates play out, while tailwinds from solid earnings and economic growth provide support on the downside.
Overall, 18% of the S&P 500 has reported very strong first quarter earnings thus far. First quarter earnings estimates reflect 18.4% growth, up from 17.3% when earnings season began and up from 10.7% at the start of the year. Approximately 82% of these companies have beaten on the bottom line for an aggregate earnings surprise of ~7%, and about two thirds of companies have beaten on the top line for an aggregate sales surprise of ~1.9%. Also, the amount and level of earnings surprises are above their respective one- and five-year averages.
Poor reaction to solid earnings has been prevalent in the start of earnings season, though, and will be important to monitor. Despite good results, the banks had a poor reaction to begin earnings season on April 13. Also, while it led the market’s mid-April advance on easing U.S.-China trade concerns, the technology sector has lagged over the past week on disappointing early reports from a few semiconductor companies (as well as poor reaction to solid Google earnings). Furthermore, industrials came under pressure Tuesday due to margin concerns on rising cost inflation. With technology, financials, and industrials making up about half of the S&P 500’s weighting as well as being three of the intermediate-term performance leaders, how these groups react moving forward will have a significant influence on overall market momentum.
Additionally, both the U.S. 10-year Treasury yield and WTI crude oil prices reached multi-year highs recently, which has influences on sector relative performance. As a result of oil’s move higher, the energy sector outperformed by ~10% over the past several weeks and is now outperforming the S&P 500 year-to-date, joined only by the technology and consumer discretionary sectors. Rising interest rates buoyed financials’ relative performance within the past week, and was a continued headwind to the “defensive” higher-yielding sectors – utilities, real estate, telecom, and consumer staples.
The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in the index. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.