For those of you who would prefer to listen:
The remarkable run this Spring continued as the Stock Market shook off the concerns surrounding the Middle East and hit fresh, all-time highs. The S&P surged in April as fast as it fell in March. These V-shaped moves have become quite familiar. Excesses get corrected quickly, clearing the decks for a swift recovery. It happened during Covid. That’s what went down last Spring around the tariff tantrum. That’s precisely what’s happened around the conflict in Iran. It goes from Bull to Bear, back to Bull in a flash. The Oil down, Stocks up tether is firmly in place. Right now, this Market is all Bulled up.
The Market had been sniffing out some sort of end, or maybe more likely an extensive reprieve, to the conflict in Iran. That provided a kickstart to stocks. News Friday morning that the Strait of Hormuz is back open, meaning Global Oil shipments can start to normalize, sent the price of Oil swiftly south and stock prices soaring north. It’s been quite an April for investors.
But this Bull run is not about the Middle East. It’s not about Oil either. Innovation is what’s driving stock prices. The Stock Market has turned its attention beyond the war. The AI-trade is back on. The March sell-off shaved the excessive valuations built up in stocks. That reset expectations. Growth is the word again. Tech came back to life. Now for the main event: It’s Earnings Season.
Emotions and speculation can take a backseat as investors can again focus on facts. Earnings Season provides the Market’s quarterly scorecard. Corporate America opens its books four times per year to show how it’s holding up in this environment and, more importantly, where it’s headed. One mustn’t forget, more than anything else, it’s earnings that are the biggest driver of stock prices.
The Street is looking for S&P 500 earnings growth of 12.6% in Q1. That is just below the +12.8% estimated at the beginning of the year, but better than the +11.4% revised expectations in response to the military conflict. It’s pretty remarkable that earnings accelerated while energy prices spiked. If the estimates are hit, this would mark the sixth consecutive quarter of double-digit earnings growth.
Tech is expected to deliver the largest earnings growth in Q1, up 45% compared to last year. Semiconductors are leading that charge with an estimated 95% increase. Basic Materials and Financials are the only other sectors expected to deliver double-digit growth. You can see, the growth is pretty concentrated. The median company is expected to grow closer to 8%. All told, AI-related stocks are expected to drive more than 60% of EPS growth in Q1. What’s really key is that revenues are expected to increase 9.8% in the quarter. That would be the best in 4 years. Strong revenues reflect strong demand for stuff. That’s a really good thing.
Beyond what companies report, it’s more important what they see ahead. The Market is always forward-looking. The heightened geopolitical uncertainty could cause more conservative guidance. It’s very difficult for companies to quantify the Middle East impact at this point, which may put the focus on the qualitative commentary surrounding input costs and supply chain disruptions. No surprise, Consumer and Transportation industries will be the focal points here.
As always, it’s the Big Banks that lead things off. They did so with solid beats. But the outlooks were mixed, leading to different results for stock prices. The commentary about the Economy and Consumer from the Big Banks remained largely positive, and the recent batch of Q1 previews painted a pretty upbeat picture. Morgan Stanley recorded a 25% increase in its stock trading revenue. Bank of America also saw double-digit revenue growth for trading. Its overall business is balanced and growing. This, from BofA CEO Brian Moynihan: “We saw healthy client activity, including solid consumer spending and stable asset quality, indicating a resilient American Economy.” Resiliency was the theme for all the Big Bank leaders when describing the American Consumer. That’s an important takeaway. Consumer spending accounts for roughly 70% of America’s Economy.
From what we gather, economic data remain strong. Transportation, which has been a core broadening theme, has rebounded sharply. High fuel prices merely slowed the growth, not derailing it. Falling fuel prices trigger growth. Lower Oil prices fall to the bottom line for Transportation companies, where higher fuel was choking. Both truck and train activity are accelerating and the recent Fed Regional Survey recorded spikes in new orders as well as CapEx plans. Our takeaway is that the recent consumer sentiment weakness reflects the chronic affordability concerns and elevated gas prices, not underlying demand. In this post-2022 “inflation anxiety” cycle, sentiment is driven more by inflation, prices, and Oil than actual growth.
What’s more, the Job Market is showing signs of improvement. AI isn’t crushing human work just yet. Payrolls are up cyclically, consistent with upturns in employment and lower jobless claims. There are real signals that Labor will continue to improve and further broaden out. That would be great news for American incomes and living standards.
PepsiCo affirmed the consumer resiliency. Volume growth picked up for its snack business for the first time in a couple of years. Pepsi cut prices on items, like Doritos, Tostitos and Lay’s, in an attempt to boost sales. Consumers had been cutting back on those snacks as inflationary pressures weighed on their wallets and processed foods weighed on their hips. The company launched a new line of protein snacks, which were an early hit. Pepsi hasn’t yet seen signs that consumers are curbing their spending in response to higher fuel prices caused by the war. Its robust global supply chain is an advantage against smaller brands.
Taiwan Semiconductor also reported this week. It’s an important barometer for AI. The numbers were strong. The takeaway: Not only has the insatiable demand for computing power not slowed. It’s accelerating. They should know. Taiwan Semi manufactures over 90% of the advanced chips around the globe. On the call, Taiwan Semi CEO C.C. Wei said AI-related demand remains robust. “Our customers and customers of customers, the cloud service providers, continue to provide us with their very strong signal and positive outlook. Thus, our conviction in the multiyear AI megatrend remains high, and we believe the demand for semiconductors will continue to be very fundamental.” That put a serious charge back into Tech stocks.
To put it mildly, the Tech-heavy NASDAQ has been on fire. The QQQ, the exchange-traded fund that tracks the NAS 100, has been up for 13 straight sessions. That is the first time that has happened since the fund’s inception in 1999. The last time it hit 12 occurred in 2009, when the new Bull Market began after the Financial Crisis came to an end. This record run reversed a streak of 10 weekly decliners in the previous 11. The Bear got blindsided by the Bull.
Despite the fresh all-time highs reached Friday for the S&P, just 18% of the 500 stocks in the index hit their highs. That is definitely not broad leadership. It was pretty concentrated in Tech again. Of course, that’s nothing new. That was the case for the Bull run since 2022. Tech is playing catch-up after months of corrective price action. Something else we learned this week: Multiple trading desks on the Street said there have been feverish buy programs in place, playing catch-up, following their heavy selling in March. This makes sense considering the explosive move. The rally also commenced when Bearish sentiment hit the highest on the year. That’s a contrarian indicator. It’s usually the zip code for bottoms. Investors are much less Bearish now in April than they were in March. There’s nothing like price to change sentiment. The chase is on.
When it comes to earnings, what matters most is what the Tech Titans report. That starts at the end of the month. The Market is already pricing in some lofty numbers. We’ll get some insight as to whether the massive spending is starting to yield results. Beyond strong earnings, icing on the cake would be the Fed cutting rates. When Energy prices fall, inflationary pressures subside. That could give the green light for the new Fed Chair to cut when he takes over. The Market sure likes the sound of that.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
