- Equity markets rallied this week on hopes of a soft landing for the economy.
- The S&P 500 rose 2.5%, with consumer discretionary, banks and technology leading the pack. Defensives (i.e., staples and health care) lagged, consistent with the broader market move back into riskier assets in recent weeks. On the year, the S&P 500 has now calmly added 6%, while the Nasdaq has popped 11%.
- Meantime, the TSX gained 1.0% as technology, health care and financials were all firmly higher. Rate-sensitive sectors (see REITs especially) have shot out of the gate with a 10% gain so far this year, and this week’s 25 bp hike-and-pause by the BoC helped the cause.
Recent earnings report seem to suggest companies are beating estimates and doing fine. Is that what we’re really seeing? In our evaluation, it’s a case of expectations vs. reality. In actual terms, some earnings numbers have been impressive and others less so. But overall, the earnings picture has appeared strong because it’s coming against the backdrop of lowered guidance. It’s that outperformance relative to expectations—in other words, optimism about 2023 after a tough 2022—that has fueled the market’s rebound. Going forward, the question is—will guidance start to pick back up? Or will this be a one-time surprise? The reality is that a slowing economy and the impacts of interest rates and a weakening consumer are likely to affect future earnings. We believe that the outlook is still overstated, and we expect downward revisions and lowered earnings outlook.
Bottom Line: Going forward, earnings won’t necessarily be bad, but there is room for disappointment.
Bottom Line: We’re likely to go from a very strong job picture to merely a good or okay one, with a bad one being prevented by the difficulty of hiring employees back.
Bottom Line: The glitch highlights the fact that these sorts of issues do occur every so often, but usually, they’re a non-factor for investors.
Bottom Line: The most likely scenario is that the Bank of Canada won’t cut rates until 2024.
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