Equities under pressure, margins tighten, and outlook dims

It is no secret that equities have increased pressure due to tightening margins. While the split between companies is about 50/50 in terms of how many S&P 500 companies (NYSEARCA: SPY) could widen their margin the net result was 30 basis points of shrinkage. This, along with the threat of inflation, higher interest rates, and recession have the earnings outlook in retreat as well and that, we think, will drive the broad market even lower.

There is still about 5% of the S&P 500 left to report for Q1 which turned out to be a very lackluster season. The final rate of growth is going to come in very near to 9.1% and may come in below that figure if the rest of retail is as bad as what we’ve seen so far. At 9.1%, the market outperformed the Marketbeat.com consensus estimate but by a mere 460 basis points compared to quadruple-digit outperformance in the 3 quarters prior, a fact that suggests earnings growth is priced in regardless of where the outlook is headed.

Downward revisions are piling up for equity markets

As tepid as the Q1 season was, it is the expectations for earnings that are driving the action now and those expectations are falling. The consensus for earnings growth in Q2 is down almost 400 basis points over the last month and falling and the estimates for Q3 and Q4 are coming down as well. The consensus estimates for Q3 and Q4 are down 160 and 140 basis points each over the last 5 weeks and they too are still falling. The only good news is the consensus for 2023 earnings growth ticked higher but don’t read too much into that fact. As it is, the outlook for 2023 is so murky we would be surprised to see any actual revisions at this point. It is more likely that the 2023 outlook ticked higher in response to the downtick for 2022.

A quick look at the Marketbeat.com upgrade/downgrades tracker will show that negative sentiment is dominating the market. While many stocks are holding their Buy ratings the price targets are falling but there are a fair number of rating downgrades as well. The early Monday action has downgrades outpacing upgrades by 2.75:1 while the price target reductions outpace the increases by more than 6:1. The most downgraded stocks of the Q1 season include Carvana and Netflix in the #1 and #2 position and there are at least 5 key S&P 500 companies in the top 25. Those include Netflix, Amazon, Walmart, Home Depot, and Starbucks, all of whom are having issues with growth and profits that are, in many cases, worsened by the fighting in Ukraine. This week there will be 13 reports from S&P 500 companies including a number of retailers and other consumer-sensitive names.

The risk for the market this week is inflation

The biggest risk for the market this week is inflation and will come in the form of FOMC minutes on Wednesday and the PCE price index on Friday. The core PCE price index is expected to hold steady on a month-to-month basis at 0.3% but moderate to 4.9% YOY. While good relative to the trend, these figures are still very hot and there is a risk of them coming in above consensus.

Turning to the chart, the S&P 500 is trying hard to stay out of a textbook bear market but the technical picture is not good. Not only is the near-term trend down but the index is below several important resistance points that are likely to keep any upward moves small and short. If the market is unhappy with the Fedspeak in the minutes or the inflation data on Friday, this market will likely move below the 3,815 low set in the previous week.

Chart

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