My happy and positive self badly wants to like how the market has been acting thus far in 2023.
The S&P 500 is up 7.7% this year and the Nasdaq Composite has gained a robust 14.7% in the year’s first five weeks.
But full stop, I think you are seeing a classic case of FOMO (fear of missing out) infiltrating these markets.
What is everyone fearful of? Missing out on the precise moment when the Fed says it will pause interest rate hikes.
This is a market pricing in the end of rate hikes for this cycle — and dare I say pricing in rate cuts at some point later in 2023. And this FOMO has built on itself since the middle of January.
But allow me to be the voice of reason for a brief moment.
Corporate fundamentals just don’t appear to warrant this upward thrust in the markets.
Per FactSet data, 70% of S&P 500 companies have reported a positive EPS surprise for the fourth quarter — below the five-year average of 77%. S&P 500 companies are beating EPS estimates for the fourth quarter by 0.6% in aggregate, shy of the five-year average of 8.6%.
Fourth quarter earnings are tracking down about 5.3%. Yes, down!
Last week, we saw an Apple earnings miss, another stinky quarter from Amazon, and a lame quarter from Alphabet thanks to ad weakness at YouTube. Meta’s quarter was poor quality, too, and earnings badly missed, but the market loved deep cuts to the company’s expense guidance for 2023.
Besides the raw numbers, the commentary from corporate executives has hardly been rah-rah. Those aforementioned tech companies continue to signal slowing demand to the extent they are searching for fresh expense offsets.
Starbucks CFO Rachel Ruggeri told me on Yahoo Finance Live on Friday they aren’t seeing the disinflation talked up by Fed Chair Jerome Powell last week, but still-rising costs.
“If we look at market pricing so far this year, it’s not even pricing in a soft landing. It’s pricing in takeoff. It’s pricing inflation to come down. It’s pricing growth to avoid a recession altogether. It’s also pricing in central banks cutting rates starting mid this year. So that is really markets are priced for perfection,” BlackRock global chief investment strategist Wei Li said on Yahoo Finance Live.
“And in the near term, beyond FOMO and chasing momentum, it’s hard to see a fundamental reason for stocks to keep pushing higher.”
Wei Li is spot on.
The market is growing more dangerous by the day. I am not trying to scare the hell out of you, but rather present the clear-headed take. Do with that what you wish.
Happy Trading!
