The three major stock market benchmarks narrowed Tuesday morning’s earlier losses to stay basically flat, as investors weighed the latest batch of company earnings. While the results across various sectors generally met or beat estimates, slightly lower markets also reflected the downbeat outlooks that could possibly foretell a coming recession.
How stocks are trading
- The S&P 500 dipped 10 points, 0.25%, to 4,009
- The Dow Jones Industrial Average fell nearly 35 points, or 0.1%, to 33,594
- The Nasdaq Composite dropped almost 24 points, or 0.2%, to 11,340
On Monday, the Dow Jones Industrial Average
rose 254 points, or 0.76%, to 33,630, the S&P 500
increased 47 points, or 1.19%, to 4,020, and the Nasdaq Composite
gained 224 points, or 2.01%, to 11,364. The Nasdaq is up 8.6% for the year but remains down 29.2% from its November 2021 record high.
What’s driving markets
Markets are trying to build on two days of gains in the thick of earnings season.
Companies presenting their results on Tuesday morning included GE GE, Johnson & Johnson JNJ, Verizon VZ, 3M MMM, Lockheed LMT, Raytheon RTX and Travelers TRV. With the tech sector under pressure, Microsoft MSFT and Texas Instruments TXN report after market close on Tuesday.
“The test of the market is this week and next week,” said Quincy Krosby, LPL Financial’s chief global strategist. The tone of forward guidance is a key part, she said. “Is guidance going to be overwhelmingly negative? Or perhaps neutral? The market is focused on this.”
If she had to give an interim grade, it’s a pass, not a letter grade. “It’s not failing, because we saw the market gain.”
The fourth quarter earnings come with cross-currents at play. The S&P 500 index is up 3.1% over the last two sessions, taking its gain for the year so far to 4.7%, as investors show conviction the Federal Reserve is going to further slow its pace of interest rate rises amid easing inflation and weakening economic indicators.
The S&P 500 dropped about 20% last year, primarily the result of the Fed swiftly raising its base rate from effectively zero to a range of 4.25% to 4.50%. The Fed hiked rates by 75 basis points in November and 50 basis points in December. Traders are pricing in a near 100% certainty that the fed funds rate will go up by just 25 basis points next week.
The hope among investors is that a less hawkish Fed will help the U.S. economy avoid a hard landing and this will support company earnings, according to analysts.
But the fear is that a hard-landing recession is still coming, as much as investors hope against it. Fourth-quarter earnings and forward guidance are a way to read the tea leaves on what could be ahead.
“Hold onto your hats as this week’s ride could be on the wild side. And judging by the wave of New Year optimism that markets seemed to have been surfing pretty happily, investors are ready to believe in soft landings,” said Danni Hewson, AJ Bell financial analyst. “The question at hand is what kind of cushioning do some of the world’s biggest companies have wrapped around them in case things end with more of a jolt?”
The other investor pitfall may be misreading Fed commentary to see more doves than hawks or hoping inflation is coming down faster than it really is, said Gargi Chaudhuri, BlackRock’s Head of iShares Investment Strategy, Americas.
“We expect inflation to stay persistently high and we take the Fed at its word that it remains committed to achieving its mandate of long-term price stability (which it defines as about 2% inflation) and raise rates to between 5-5.25%. We do not expect the Fed to ease this year, even as growth slows, making it likely that we will see a recession in the U.S. in the second half of 2023,” Chaudhuri said in a note.
Ahead of Tuesday, the latest bounce for Wall Street has taken the S&P 500 through some important technical milestones — closing above 4,000 and its 200-day moving average — and this may bode well for the medium term, analysts said.
“The 2022 bear market looks to be on thin ice. The SPX’s second straight day higher has successfully broken out above January 2023 highs,” wrote Mark Newton, head of technical strategy at Fundstrat, in a note to clients.
Of course, key issues are unresolved, Krosby said in a phone interview. “The question is whether this is a traders’ rally, or whether this is a rally underpinned by investors coming in with the understanding of a still-difficult transition to a market that’s free of worries of another bear market sell off.”
U.S. economic updates include the ‘flash’ S&P U.S. manufacturing and services PMIs for January. The manufacturing PMI climbed to 46.7 from 46.2, a 31-month low. The services PMI rose to 46.6 from 44.7. While both numbers are increasing month-to-month, any read below 50 points to a shrinking economy.
Companies in focus
stock was essentially flat after fourth-quarter earnings matched earnings per share expectations at $1.19 and beat revenue expectations, bringing in $35.3 billion, but the full-year earnings outlook for the telecoms giant did not meet analyst expectations.
- 3M MMM stock dropped after a miss on earnings per share and guidance that did not meet analyst expectations. The manufacturing giant said it is also planning to cut 2,500 jobs from its global manufacturing roles. Shares are off nearly 5%.
- Johnson & Johnson JNJ shares were lower after the drug company reported earnings that beat profit estimates but missed revenue forecasts and full-year earnings outlook above estimates. Shares are off by approximately 1%.
- Lockheed Martin LMT shares were up nearly 2% after the defense company posted both earnings and revenue that topped forecasts.
- Travelers Companies Inc. TRV matched profit expectations and beat revenue forecasts, even with the insurer’s warnings about the financial aftermath of a massive winter storm in late December. Shares were trading more than 2% higher.
- General Electric Co. GE shares were basically flat after a downbeat earnings outlook, even with profit, revenue and free cash flow numbers that exceeded analyst expectations. The industrial conglomerate was anticipating continuing earnings per share in 2023 of around $1.60 to $2.00. That’s below the FactSet consensus of $2.37.