Q1 Earnings Season Could Sharpen Differences Between Winners and Losers

Ed Mertiri |

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What do the increasingly hawkish Fed comments really mean to investors


What Happened:

Investors processed the sharply hawkish comments from Federal Reserve officials last week. Last week’s selling was focused on pushing bond prices down. The inverted yield curve remains between the 3-to-10-year treasuries even after the sharp rise in yields but remains slight. The biggest inversion was the 7-year yield closing at 2.79% versus 2.72% for the 10-year.

Gold, a traditional safe haven, barely budged, indicating the selloff was mostly around interest rates and less about economic fears. Also, the equity selling was not universal. Defensive sectors like Healthcare, Consumer Staples, Energy and Utilities all ended the week in the green. Defensive plays remain much closer to their January highs than high beta but all remain range bound.

Weeks Ahead:

The next worry investors will be focused on is first quarter earnings season which starts this week and is in full swing towards the end of the month. Investors will be focused on how companies manage higher costs, from raw materials to wages, and their guidance for the remainder of the year. Q1 2022 is expected to have the slowest growth of the year, the S&P 500 expects 4.6% EPS growth Y/Y. Profit growth and margins are expected to progressively expand for the remainder of the year. Any company hinting at missing those expectations could take a sharp hit on price given the nervous investor sentiment.

The sharp difference between sector winners and losers in Q1 profit growth forecasts has already been reflected in many sectors’ price performance. Financials, Consumer Discretionary and Communication Services sectors’ profits are expected to contract in Q1, in contrast to big profit expansions in Energy, Industrials, Materials and Real Estate. (see chart). This remains a market for selective trading, rather than broad market bets.

Of Note:

The S&P 500 technology stock sector has been hard particularly hard the past 3 months. In private markets the technology sector has also seen a sharp drop in merger and acquisition deal values but NOT in the number of deals. Q1 produced a record number deals, as values dropped, indicating the in the private market, companies are willing to buy the dip. We haven’t seen high volume in the stock market, so while stock investors are sitting in the sidelines, private M&A deals are jumping in. This might be indication of long-term confidence in technology companies while shorter term stock investors look for defense

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