Friday, April 14, 2023
- Earnings season officially kicked off today with the major money center banks reporting first quarter (Q1) results. Expectations are running low as earnings estimates have been continuously revised down into the quarter.
- The downward revisions have failed to stop the broader market’s recovery. While the fundamental bar may be set low, the rally into earnings season may raise the technical bar for stocks, especially with the S&P 500 now contending with key resistance at 4,200.
- Short-term rallies ahead of earnings season have historically led to continued upside momentum for the S&P 500 during the reporting period, albeit at a moderated pace.
- Outsized contributions from mega cap stocks this year have raised concerns over market breadth. While around 60% of S&P 500 stocks are trading above their 200-day moving average, only 32% are outperforming the market this year.
Earnings season officially kicked off today with the major money center banks reporting first quarter (Q1) results. Expectations into the quarter are running low as S&P 500 earnings per share (EPS) estimates are at -6.8%, according to FactSet. This marks a sizable drop from the -0.3% Q1 estimate at the start of the year and potentially the largest quarter-over-quarter earnings decline since Q2 2020.
The downward revisions this quarter have failed to stop the broader market’s recovery. The S&P 500 has amassed a total year to date return of 8.9% as of April 13, with most of those gains generated over the last four weeks. While the fundamental bar may be set low, the rally into earnings season may raise the technical bar for stocks, especially with the S&P 500 now contending with key resistance at 4,200.
Coming in Hot
With the S&P 500 trading up 5% over the last four weeks, we analyzed S&P 500 price action for pre-earnings season outlier performance going back to 2000. Outlier performance was defined as four-week price returns of +/-3% into earnings season. The start of earnings season was based on the first major money center banks’ earnings dates. (We also included Alcoa earnings dates as the company historically kicked off the reporting period until it left the Dow Jones Industrial Average and eventually split into two companies in 2016.)
Since 2000, we found 27 other quarters when the S&P 500 rallied at least 3% four weeks before the start of earnings season. As shown above, these outlier returns historically point to continued upside momentum for the index after the kickoff of earnings season, albeit at a moderated pace. The average and median seven-week (encompasses most earnings seasons) forward returns during the reporting period were 1.4% and 3.1%, respectively.
During sell-offs into earnings season, the index still advanced by an average of 1.4% during the seven-week reporting period, although median returns came in at only 0.4%. For additional context, the average S&P 500 four- and seven-week returns since 2000 have been 0.5% and 0.8%, respectively.
The Generals Lead
As noted previously, the S&P 500 has generated a total return of over 8% this year. Most of the gains have been driven by a select number of mega cap names (aka the “Generals”). Shares of AAPL, MSFT, NVDA, META, GOOG/L, TSLA, and AMZN have contributed to nearly 3/4 of the index’s overall year-to-date gain. These stocks collectively represent around a 22% weighting within the S&P 500.
The outsized mega cap contributions have raised concerns over narrow market breadth. While around 60% of S&P 500 stocks are trading above their 200-day moving average, only 32% are outperforming the market this year. On a more positive note, the technology, communication services, and consumer discretionary sectors have the highest percentage of stocks outperforming. We view this as a constructive sign for the broader equity market, given their offensive tilt and 53% collective weighting within the S&P 500.
Bottom line, while the fundamental bar for Q1 earnings season may be low, the rally into earnings season raises the technical bar for stocks, especially with the S&P 500 contending with key resistance at 4,200. History suggests S&P 500 price momentum into earnings season could continue, as the broader market has posted above-average gains during the reporting season after sizable pre-earnings rallies.
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