Earnings Season Kicks Off

Stocks opened higher this morning, with the S&P 500 very close to its 2022 all-time high. The Nasdaq 100 just touched a new record high. This move not only defies traders’ expectations but it is also defying the bond market. Today bonds are selling off as interest rates move higher and that’s usually enough to deliver a beating to stocks. So what is happening here? CNBC reporter Bob Pisani explains, “Everyone was hunkered down for a garden variety correction of a 5% to 10% decline—not even that happened. January 4th was the low.” He quotes Wedbush trader Dan Ives thus: “With 2024 kicking off and the bears in typical fashion yelling fire in a crowded theater to start the year on valuation and recession worries, now all [Wall] Street eyes are on 4Q earnings season…”

About 50 of the S&P 500 companies have reported fourth quarter results and I’ll summarize a few of the early takeaways. Banks reported stable but unimpressive revenue. Loan defaults remain low but ticked up a bit and the credit environment is “normalizing.” Banks are setting aside more reserves to deal with that. No big surprises or blow-ups here. Humana told us demand for medical procedures is rising, and that should be good for device companies this year. Big tech companies continue to raise expectations for AI demand, and it looks like cloud computing and cyber security are faring better. JB Hunt said they’re seeing nascent signs of a recovery in demand for shipping services. Travelers suggested the insurance market is strong on fewer catastrophes and higher prices. So thus far, messaging is fairly positive.

The economy may be slowing—as everyone expects—from a rather robust 2023, but the latest data don’t seem to agree. Retail sales jumped .6% in December from the prior month, which was far better than projected. Holiday shopping boosted department store sales and we haven’t seen that in a while. Compared with December 2022, retail sales rose a very healthy 5.6%. Consumer sentiment surged this month according a University of Michigan survey, both regarding current economic conditions and future expectations. Respondents expect inflation to fall to 2.9% this year. That last detail will make the Federal Reserve happy. And finally, the job market remains resilient. New filings for unemployment insurance—already at low levels—have been trending steadily lower since June. The latest BLS survey indicates 8.8 million open job positions throughout the country vs. 6.3 million unemployed people.