Interest Rates and Earnings Are Still Main S&P 500 Drivers

Minneapolis Fed President Neel Kashkari pointed out that financial markets seem more confident than central bankers that US inflation will quickly fall back to the Fed’s +2% target rate. However, Kashkari warned that he and “most” of his colleagues believe the Fed’s benchmark rate will need to go above 5% and stay there “for a long time.”

Interest Rates

That sentiment was reiterated by several other Fed officials yesterday who stressed that they are prepared for a long battle, particularly with inflation still being fanned by the tight labor market and healthy consumer spending.

Wall Street is also starting to bet on a higher Fed funds rate with traders giving a nearly 35% chance of rates climbing to 5.25% to 5.5% at the June meeting, up from just 2% at the beginning of the month. That would imply a 25-basis point rate hike at each of the Fed’s next 3 policy meetings.

While more bulls seem to be growing comfortable with a more “hawkish” Fed and the ability of the US economy to withstand the tighter financial conditions, worries about corporate profits are another matter.

Consumer goods companies are expected to have the toughest road ahead as the “disinflation” trend combined with less discretionary spending take a toll. The tech sector is another concern, partially due to higher rates but also because of the end of the pandemic-induced growth boom. Analysts and companies alike believe that enormous growth pulled ahead investment in technology by as much as 5 years.

With many businesses now looking to trim costs, there are worries that the pullback in tech investment could be more substantial than Wall Street is anticipating.

Earnings

The biggest firms in the sector, including Meta Platforms Inc., Apple, Amazon, and Google-parent Alphabet, in aggregate missed consensus earnings estimates by 8%, according to Bank of America analysis.

Over 70% of S&P 500 companies have reported Q4 results now. For the first quarter of 2023, 42 companies in the S&P 500 have issued negative earnings guidance, according to Refinitiv.

Only 8 have issued positive guidance, while the rest have made no change or issued none at all. Results are due today from AbbVie, AstraZeneca, Cloudflare, Duke Energy, Expedia, Hilton Worldwide, Kellogg’s, PayPal, PepsiCo, Siemens, S&P Global, TotalEnergies, and Unilever.

On the economic data front, the only thing on the calendar today is Weekly Jobless Claims.