Dear Friends,
In the past two weeks, over 40% of S&P 500 companies have reported their 4th quarter earnings for 2023, including big tech companies such as Tesla, Google, Apple, Microsoft, Meta, and Amazon. In aggregate, companies are reporting earnings that are 2.6% above estimates. However, the US job report released today combined with the recent Fed meeting news has not favored equity markets. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. Jobs Report Shows Labor Market Stays Hot
Jobs growth far outstripped economists’ expectations in January, the latest surprise delivered by a labor market that has repeatedly defied predictions of a significant slowdown. Employers added a seasonally adjusted 353,000 jobs last month, the Labor Department reported Friday, the strongest in a year. December’s payroll gains were revised upward to 333,000 from 216,000, suggesting that higher interest rates haven’t cooled hiring as much as economists had previously thought. The unemployment rate in January held steady at 3.7%. Wages also outpaced expectations, jumping 4.5% last month from a year earlier, though hours worked dropped—a possible result of bad winter weather, some analysts said. Economists surveyed by The Wall Street Journal had anticipated that Friday’s report would show that the economy added 185,000 new jobs in January and that the unemployment rate would tick up to 3.8%.
Before Friday, recent data had gradually shown the labor market cooling, with wage growth easing and the pace of hiring moderating. A large share of hiring last year came from three sectors: government, healthcare, and restaurants and hotels. Other sectors have returned to a slower pace of growth. Meanwhile, weekly initial claims for unemployment insurance have recently jumped, a sign that layoffs might have picked up, although not to levels economists consider worrisome. Still, demand for workers has proved much more resilient than many investors and analysts had expected, given the Fed’s aggressive rate increases. Officials raised rates last year to the highest level in more than 20 years, but the economy, far from falling into recession, has grown at a surprisingly brisk pace. The Fed’s preferred inflation gauge was 2.6% in December, not far from the central bank’s 2% goal.1
2. Fourth-Quarter Earnings Are Shaping up To Be the Best of 2023
Here’s how big of a surprise corporate profit has been this earnings season: the fourth quarter is now shaping up to be the best of 2023. Despite ongoing macroeconomic concerns that have hampered demand and weighed on consumer sentiment, almost halfway into earnings season, profits are coming in far better than anybody expected. Helping companies’ bottom lines this round: easing input costs; more emphasis on cost control and efficiencies; and significantly reduced expectations.
A plethora of significant earnings beats among some very important S&P 500 companies like Amazon, Meta, Apple, Chevron, Exxon Mobil, Merck, and Bristol-Myers Squibb have moved the Q4 growth rate notably higher late this week. LSEG, formerly Refinitiv, is now seeing a nearly 8% rise in earnings growth this season. That’s far better than the 4.7% expected just three weeks ago, right before the big banks reported the results. Stronger-than-expected results from three sectors are particularly notable:
Energy – 90% of the companies have beaten earnings estimates, with profits coming in almost 14% above expectations.
Health Care – 85% have beat on the bottom line, with earnings coming in nearly 11% above expectations.
Tech – 84% have posted earnings beats, with earnings more than 5% above expectations.
As for the S&P 500, Q4′s current EPS growth rate of 7.8% exceeds the 7.5% growth seen in all Q3 – and is now top for the year. Currently, 80% of S&P 500 earnings results have beat estimates, slightly higher than normal trends, and earnings have come in more than 6% above expectations — not quite the 7% to 8% upside seen in the previous two quarters, but still a very strong number.5
3. Fed Keeps Rates Steady While Powell Says March Cut Unlikely
The Federal Reserve held interest rates steady for a fourth straight meeting and signaled an openness to cutting them, though Fed Chair Jerome Powell threw cold water on investors’ hopes that reductions would begin in March. The central bank’s policy-making Federal Open Market Committee showed it is in no rush to reduce rates, noting in a statement Wednesday that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Powell reinforced this message by saying, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting.” While Powell acknowledged the dramatic inflation progress seen in recent months, he repeatedly emphasized the need to see “more” data confirming that downward trend. Powell spoke just after the Fed issued a statement following their two-day meeting, where officials dropped their previous assertion that a rate hike was possible and instead adopted a more even-handed assessment of the future policy path. The decision to leave the target range for the benchmark federal funds rate unchanged at a 22-year-high of 5.25% to 5.5% was unanimous. The central bank also reiterated its intention to continue reducing its balance sheet by as much as $95 billion per month. Powell told reporters Fed officials plan to start in-depth talks about the balance sheet at their March meeting.2
4. Japan Economy Likely Returned to Growth in Q4 2023
Japan’s economy likely swung back to growth in the October-December period, helped by a slight pickup in external demand, though analysts warned private consumption remains fragile, a Reuters poll showed on Friday. The expected return to expansion, albeit modest, would come at a time when the Bank of Japan is debating the likelihood of a near-term exit from its massive stimulus program and is closely monitoring upcoming wage talks and consumer spending.
Gross domestic product (GDP) in the world’s third-largest economy was expected to have expanded by an annualized 1.4% in the fourth quarter, after contracting 2.9% in July-September, according to the median forecast of 16 economists in the poll. On a quarter-on-quarter basis, the economy grew 0.3% in the October-December period. The moderate reading expected likely reflected weak growth in capital expenditure and soft consumption as inflation continued to outpace wage growth. At the same time, an increase in external demand thanks to solid performance in service exports boosted the overall figure, analysts said. Consumption probably rose 0.1% in October-December from the previous quarter after slipping 0.2% in the July-September period, the poll showed. Capital expenditure was believed to have risen 0.3% in the fourth quarter after slumping 0.4% in July-September, according to the poll. External demand was projected to have contributed 0.3 percentage points in the fourth quarter after shaving 0.1 percentage points off.3
5. IMF World Economic Outlook Update
Based on the latest report by the International Monetary Fund (IMF), global growth is projected at 3.1 percent in 2024 and 3.2 percent in 2025, with the 2024 forecast 0.2 percentage points higher than that in the October 2023 World Economic Outlook (WEO) on account of greater-than-expected resilience in the United States and several large emerging market and developing economies, as well as fiscal support in China. The forecast for 2024–25 is, however, below the historical (2000–19) average of 3.8 percent, with elevated central bank policy rates to fight inflation, a withdrawal of fiscal support amid high debt weighing on economic activity, and low underlying productivity growth. Inflation is falling faster than expected in most regions, during unwinding supply-side issues and restrictive monetary policy. Global headline inflation is expected to fall to 5.8 percent in 2024 and to 4.4 percent in 2025, with the 2025 forecast revised down.
With disinflation and steady growth, the likelihood of a hard landing has receded, and risks to global growth are broadly balanced. On the upside, faster disinflation could lead to further easing of financial conditions. A looser fiscal policy than necessary and then assumed in the projections could imply temporarily higher growth, but at the risk of a more costly adjustment later. Stronger structural reform momentum could bolster productivity with positive cross-border spillovers. On the downside, new commodity price spikes from geopolitical shocks––including continued attacks in the Red Sea––and supply disruptions or more persistent underlying inflation could prolong tight monetary conditions. Deepening property sector woes in China or, elsewhere, a disruptive turn to tax hikes and spending cuts could also cause growth disappointments.4
Financial Markets
1. S&P 500 Rises for a Fourth-Straight Week on Strong Tech Earnings
The S&P 500 notched a fresh record high on Friday as quarterly results from technology companies including Facebook-parent Meta topped expectations and the January jobs report came in much better than expected. The broad market index added 1.1% to close at 4,958.61, above its previous record close of 4,927.93 reached on Monday. The Dow Jones Industrial Average added 134.58 points, or 0.4%, to 38,654.42, also a record close. The Nasdaq Composite climbed 1.7% to 15,628.95. For the week, the S&P 500 added 1.4%, the Nasdaq Composite gained 1.1% and the Dow rose 1.4%. It was the fourth week in a row of gains for the major benchmarks after a stumble to start 2024.
Shares of Meta popped more than 20% after the social media giant’s quarterly results topped analysts’ expectations. Facebook-parent also announced it will pay a quarterly dividend for the first time, and it authorized a $50 billion share buyback program. Amazon shares jumped 7.9% on fourth-quarter earnings beat. The rise in tech stocks helped shift investor focus from a scorching jobs report earlier on Friday that spiked interest rates. The benchmark 10-year Treasury yield jumped a whopping 17 basis points to 4.02% after the government reported the U.S. economy added 353,000 jobs in January, well above the Dow Jones estimate from economists of 185,000.5
2. Meta Stock Surges, Amazon Gains and Apple Slips
Apple, Amazon.com, and Meta Platforms shares are moving sharply after results from the three members of the Magnificent Seven. In recent trading, Meta surged about 21% to a new intraday high. It was the S&P 500’s best performer on Friday. Amazon stock rose about 8%. Apple shares edged lower.
Some key readouts from Thursday evening’s results:
Apple posted a sales increase for the all-important holiday quarter, ending a recent slump that had been one of the company’s worst earnings streaks in more than two decades. Revenue exceeded $119 billion, ahead of Wall Street’s expectation of about $118 billion, according to FactSet. Per-share earnings came in at $2.18, higher than the $2.10 consensus estimate. But in China—which has been the most concerning aspect of Apple’s business for investors—revenue sank by a steeper-than-expected 13% to $21 billion.
Amazon.com reported strong growth in sales and profit for the end of last year as robust holiday spending online helped extend its recovery from a post-pandemic slump. The company reported $170 billion in fourth-quarter sales, above FactSet’s consensus estimate of $166 billion. Earnings came in at $1.03 a share, ahead of the 80 cents a share estimate.
Facebook parent Meta Platforms posted its best quarterly sales growth in more than two years and initiated its first-ever dividend, a testament to its investments in artificial intelligence that have made targeted ads smarter. Sales topped $40 billion, ahead of FactSet’s $39.12 billion consensus. Earnings were $5.33 a share, stronger than the expected $4.82. The company said it will pay a dividend of 50 cents per share.1
3. Toyota to Outshine Rivals as More Consumers Opt for Hybrids
Toyota sold just 104,000 battery EVs last year, less than 1% of its total sales, including of its luxury Lexus brand. It plans to boost shipments to 1.5 million EVs by 2026, below Tesla’s 2023 shipments of 1.8 million vehicles. Toyota takes a “multi-pathway” approach to satisfying customer needs in every market, and Chairman Akio Toyoda said last month that battery EVs would reach a market share of 30% at most, with hybrids, hydrogen fuel-cell cars and fuel-burning vehicles making up the rest.
U.S. hybrid sales have been rising as consumers balk at high EV prices and are anxious about the range of electric cars, especially in more rural areas, where there could be long distances between charging stations. But demand for hybrids is so strong that buyers must wait for about a year to get deliveries of some models such as the Toyota Sienna multi-purpose vehicle, and pay full manufacturer-suggested retail prices, he said. In stark contrast, Tesla, which has been offering sharp price cuts since last year in major markets including the U.S. and China, suffered a vehicle margin reduction last quarter and warned of slowing EV demand this year. Hybrids accounted for 9.3% of new light vehicle registrations in the United States from January to November in 2023, outstripping those of EVs by 1.8 percentage points, according to S&P Global Mobility data. That is benefiting Toyota, which was the biggest hybrid seller in the U.S. with more than one-third of the new registrations, followed by Honda Motor with 20%, South Korea’s Hyundai Motor and its affiliate Kia, and Ford Motor.3
4. UPS Weighs Sale of Coyote Logistics
United Parcel Service said it is looking at a potential sale or other strategic alternatives for its brokerage unit Coyote Logistics. Chief Executive Carol Tomé said on a Tuesday earnings call that the unit, which matches loads with available trucks, is too exposed to swing in the trucking market and is a drag on UPS’s earnings. Freight brokerage activity soared during the first two years of the COVID pandemic when demand for space in trailers outstripped supply, forcing many shippers to trucking’s volatile spot market. Brokerages have struggled since 2022 because of a prolonged slump in freight volumes. Cass Information Systems reported in its monthly Cass Freight Index that freight rates across U.S. domestic trucking and rail networks were down 17.7% in December from the same month last year.
Revenue at UPS’s supply chain solutions business unit, which includes Coyote, fell more than $3 billion, or almost 20%, in 2023 compared with the prior year. The company doesn’t break out Coyote’s financial data, but Tomé said the broker accounted for 38% of the unit’s decline for the year and 48% of the decline for the fourth quarter. Coyote Logistics was roughly the tenth largest freight broker in the U.S. by revenue in 2022, according to transportation industry consultancy SJ Consulting Group. UPS bought Coyote in 2015 for $1.8 billion. Coyote at that time was an industry leader in using technology to fill trucks after they dropped off a load, reducing waste and improving efficiency.1
5. Lululemon to Launch First Men’s Footwear Line as It Chases Growth
Lululemon is launching its first men’s footwear line and casual sneakers as the retailer looks for new avenues of growth in the increasingly crowded athletic apparel space, the company announced Thursday. The retailer is debuting its first casual sneaker, dubbed “City Verse,” along with two new running shoes that will all come in both men’s and women’s styles for the first time. City Verse will launch on Feb. 13, while the new running models will debut in March and May.
Lululemon’s foray into men’s footwear is part of a larger strategy the company announced in April 2022 to double its men’s business and grow revenue to $12.5 billion by 2026.“Doubling the men’s business is a key growth pillar for us, and while footwear is a relatively small category for us and we’re early in our footwear journey, we’re excited by the prospect of just the role it plays in offering him more choice,” Lululemon’s chief brand officer, Nikki Neuburger, told CNBC in an interview. The launch comes as Lululemon grows at a slower rate than it has in the past, and competition from both legacy players like Nike and newer entrants such as On Running heats up. In the three months ended Oct. 29, Lululemon posted a 19% jump in sales, down from a 28% spike in the year-ago quarter. Most of Wall Street still considers Lululemon a best-in-class retailer, but some firms are expecting its growth to moderate more as the company matures and demand across the sector slows. Last week, HSBC downgraded Lululemon to hold from a previous buy rating, because it expects its strong performance compared with other retailers to narrow as demand slows.5
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.reuters.com
(4) www.imf.org
(5) www.cnbc.com
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