Equity markets posted a steady run of earnings-led gains this week that has left the S&P 500 within striking distance of the late-March high.
The index rose 1.9% on the week, led by utilities, banks and materials, while all remaining sectors posted gains.
The TSX added 1.6%, with strength in materials and energy outweighing weakness in health care and energy.
Earnings
Markets rallied to start the month of May, seemingly because of resilient earnings, but tapered off somewhat last week due to weak outlooks. With these two competing factors in mind, what’s the big takeaway from earnings season? In our view, the key is that if a company had a strong earnings beat AND had a positive outlook, the market rewarded them—but they needed both to do well. Conversely, if a company’s outlook was poor, they were punished to the tune of 10%-plus declines in stock price. A mix of decent earnings but poor outlook also got punished, as in the case of Meta. There were a few exceptions—Tesla, for instance, didn’t have strong earnings but got a nice bump from a bullish outlook. But overall, it was a company-by-company story, and both strong earnings and a positive outlook were needed to realize any significant upside. Taking a step back, markets are also trying to decipher the pros and cons of economic data. In this environment, bad news could be good news, as a weakening economy could mean that rate cuts will arrive sooner. In our view, that’s one of the reasons we’ve seen some back-and-forth motion in markets of late.
Bottom Line: Both earnings and outlook are driving stock prices, with markets generally only rewarding companies who reported good news on both fronts.
Oil
WTI crude oil prices have declined to below $80 per barrel from their April highs in the $85 range. This movement validates some changes we’d made to our Energy position over the past few months—we had been bullish on Energy, but when oil prices increased, we sold some options and moved back down to a neutral position. While we remain neutral for now, we think that $80-$90 per barrel is the right range, meaning that prices likely have room to move up. When prices reached the higher end of that range earlier this year, it was likely due to geopolitical risks rather than the fundamentals of supply and demand, which appear to be fairly balanced. Our expectation is that the Organization of the Petroleum Exporting Countries (OPEC) will hold steady at their next meeting rather than increase supply. Meanwhile, demand may be decreasing slightly, but not enough to cause a big movement in prices. Looking ahead, we believe that there is upside in Energy due to probable increased demand. We don’t plan on adding to our Energy position in the near term, but we are currently holding on to what we already have in our portfolios.
Bottom Line: We remain neutral on Energy, but we do expect oil prices to move higher by the end of the year.
Business Sentiment
Much is written about consumer sentiment, but what about business owner sentiment—can it provide insight into whether the economy may weaken? We see two angles to this story. For small business owners, sentiment appears to be negative because higher interest rates tend to have an outsized effect on their businesses and cash flow compared to larger companies. Hiring intentions are lower on this front as well. For larger businesses, sentiment is a bit more mixed, and it tends to be more sector- and industry-specific. For instance, many large Technology companies have already done their job cutting, while in other areas, layoffs are likely to occur as firms grapple with higher costs, lower inflation (impacting revenues), and adjustments in consumer spending patterns. The first sign of potential economic weakening has already happened: companies are not hiring as much. The next step would be a shift to hiring for temporary positions rather than full-time work. And the third and final step would be actual job cuts. We haven’t seen much of that yet outside of specific sectors like Tech. Interestingly, Uber and Lyft both recently reported that demand for $20-$30 rides has remained relatively strong. This indicates that the consumer may not be weakening as quickly as some had anticipated—even if higher-end “Discretionary-like” retailers like Starbucks and Lululemon have taken a hit from lower consumer demand. This tells us that not all consumers are feeling the same effect of higher interest rates.
Bottom Line: Small business sentiment is more negative than large business sentiment, and while job cuts may materialize down the road, the consumer continues to hold up relatively well.
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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The Secret Recipe for an Earnings Rally
May 13 to 17, 2024
The Secret Recipe for an Earnings Rally
May 13 to 17, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Earnings
Markets rallied to start the month of May, seemingly because of resilient earnings, but tapered off somewhat last week due to weak outlooks. With these two competing factors in mind, what’s the big takeaway from earnings season? In our view, the key is that if a company had a strong earnings beat AND had a positive outlook, the market rewarded them—but they needed both to do well. Conversely, if a company’s outlook was poor, they were punished to the tune of 10%-plus declines in stock price. A mix of decent earnings but poor outlook also got punished, as in the case of Meta. There were a few exceptions—Tesla, for instance, didn’t have strong earnings but got a nice bump from a bullish outlook. But overall, it was a company-by-company story, and both strong earnings and a positive outlook were needed to realize any significant upside. Taking a step back, markets are also trying to decipher the pros and cons of economic data. In this environment, bad news could be good news, as a weakening economy could mean that rate cuts will arrive sooner. In our view, that’s one of the reasons we’ve seen some back-and-forth motion in markets of late.
Bottom Line: Both earnings and outlook are driving stock prices, with markets generally only rewarding companies who reported good news on both fronts.
Oil
WTI crude oil prices have declined to below $80 per barrel from their April highs in the $85 range. This movement validates some changes we’d made to our Energy position over the past few months—we had been bullish on Energy, but when oil prices increased, we sold some options and moved back down to a neutral position. While we remain neutral for now, we think that $80-$90 per barrel is the right range, meaning that prices likely have room to move up. When prices reached the higher end of that range earlier this year, it was likely due to geopolitical risks rather than the fundamentals of supply and demand, which appear to be fairly balanced. Our expectation is that the Organization of the Petroleum Exporting Countries (OPEC) will hold steady at their next meeting rather than increase supply. Meanwhile, demand may be decreasing slightly, but not enough to cause a big movement in prices. Looking ahead, we believe that there is upside in Energy due to probable increased demand. We don’t plan on adding to our Energy position in the near term, but we are currently holding on to what we already have in our portfolios.
Bottom Line: We remain neutral on Energy, but we do expect oil prices to move higher by the end of the year.
Business Sentiment
Much is written about consumer sentiment, but what about business owner sentiment—can it provide insight into whether the economy may weaken? We see two angles to this story. For small business owners, sentiment appears to be negative because higher interest rates tend to have an outsized effect on their businesses and cash flow compared to larger companies. Hiring intentions are lower on this front as well. For larger businesses, sentiment is a bit more mixed, and it tends to be more sector- and industry-specific. For instance, many large Technology companies have already done their job cutting, while in other areas, layoffs are likely to occur as firms grapple with higher costs, lower inflation (impacting revenues), and adjustments in consumer spending patterns. The first sign of potential economic weakening has already happened: companies are not hiring as much. The next step would be a shift to hiring for temporary positions rather than full-time work. And the third and final step would be actual job cuts. We haven’t seen much of that yet outside of specific sectors like Tech. Interestingly, Uber and Lyft both recently reported that demand for $20-$30 rides has remained relatively strong. This indicates that the consumer may not be weakening as quickly as some had anticipated—even if higher-end “Discretionary-like” retailers like Starbucks and Lululemon have taken a hit from lower consumer demand. This tells us that not all consumers are feeling the same effect of higher interest rates.
Bottom Line: Small business sentiment is more negative than large business sentiment, and while job cuts may materialize down the road, the consumer continues to hold up relatively well.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Fed’s Last Stand: A Solitary Rate Cut Expected for 2024.
Disclosures:
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Insights
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