A Cliffhanger
Technology stocks have been on a rollercoaster ride this year as valuations reached a vertical limit. The Magnificent 7 technology stocks as a group declined about 11% in the first quarter. These stocks rebounded strongly over the past couple of weeks, rising about 20% from the March lows. In fact, the “Mag 7” accounted for about 60% of the rebound in the S&P500 since the March bottom. Even with that rebound, the Mag 7 stocks are only up about 2% year to date as a group, compared to the S&P 500 Index which has gained about 4% so far this year with help from other sectors.
Large technology company earnings reports peak this week, with reports from Amazon#, Alphabet#, Microsoft#, and Meta# after today’s stock market close. Apple# reports results on Thursday. There will be significant focus on US corporate earnings in general during this peak week of Q1 earnings reports. 180 S&P 500 companies are set to report, including five of the Magnificent 7 names, and representing nearly $30 trillion in market cap. With 28% of index members having already reported, earnings growth topped 15% for the first quarter. Moreover, the earnings surprise magnitude is running well ahead of long-term averages while EPS guidance for the next twelve months continues to accelerate. At the same time, concern about the impact from increased energy costs and supply chain constraints could pressure corporate margins in the future. However, corporate earnings and forecasts are not showing signs of strain just yet.
Changing of the Guard at the Fed
The Federal Reserve, European Central Bank and peers in Japan, the UK and Canada are all scheduled to set interest rates this week, together deciding monetary policy for about half of the world’s economy. The U.S. Federal Open Market Committee (FOMC) interest rate-setting meeting ends later today with the release of a policy statement and Fed Chairman Jerome Powell’s press conference. This is expected to be Chairman Powell’s last FOMC meeting as new Fed Chair Kevin Warsh is expected to be confirmed. The Senate Banking Committee is expected to advance Kevin Warsh’s nomination to the full Senate, with a vote now set for today. The timing increases the chances that Warsh will be in place by the time Powell’s leadership term ends on May 15, and to run the Fed’s next meeting in June. Markets are pricing in a nearly 100% chance of the Fed holding rates steady, with likely one dissent, similar to the March decision. The Middle East conflict and a resilient macroeconomic backdrop, including stable labor market trends and resilient consumer spending, are expected to create future inflation pressures. That will likely suppress any inclination to lower interest rates near term.
Earnings to the Rescue
Equity valuations started the year in rarified air compared to historical valuations. However, valuation multiples have since compressed by about 10% while first quarter earnings have come to the rescue so far. Consumer spending remains resilient despite higher gasoline and energy prices. As an example, Visa# posted strong first quarter revenue growth of 17%, the highest rate of growth since 2022. Earnings increased 20% over the prior year. American Express# also reported strong first-quarter results as net interest income growth and spending volume continued to impress. Revenue rose 11% from last year while earnings increased 18% due to solid consumer spending trends.
On the consumer products side, Coca-Cola#, the world’s largest soft drink company, posted effervescent first-quarter earnings and revenue that handily topped expectations. Revenue grew 12%, ahead of forecasts, and earnings grew 18% over the prior year. Sales of drink concentrates picked up 8% in the quarter, while pricing and product mix accounted for a 2% increase in revenue. Global unit case volume rose 3%, led by a 5% increase in the Asia-Pacific region. The company now expects earnings to grow 8% to 9% for the full year as soft drinks and diet-related products sparkle.
While Magnificent Seven stocks have rebounded recently, concerns over excessive spending on AI infrastructure buildout and consequent depletion of free cash flow suggest a rocky road ahead. We will receive an updated read on AI capital spending from a few of the hyperscalers this week. The economy is still ascending, but so are oil and energy prices. In mountain climbing parlance, we are in the “crux” period, the most difficult section of a climbing route. In the meantime, the path of the Federal Reserve is not a cliffhanger in the near term, with no change in short term interest rates expected today. The 10-year Treasury yield at 4.3% is about where it was one year ago, but bears watching. Housing starts and capital goods orders for March were reported this morning, and both metrics were strong and above expectations. Technology earnings reports this evening will be even more important to help anchor overall earnings expectations going into the second half of the year.
Country music star Willie Nelson is on the road again at 93 today, actress Uma Thurman turns 56, actress Michelle Pfeiffer turns 68 and comedian Jerry Seinfeld turns 72 today. Not that there’s anything wrong with that.
Christopher Crooks, CFA®, CFP® 610-260-2219