Categories:
Key areas of focus
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The economic health of the U.S. consumer will be in focus this week. Markets will turn their attention to the delayed January Payrolls report on Wednesday, alongside December Retail Sales. With consumer spending accounting for roughly two-thirds of GDP, these data points remain critical to assessing the overall economic landscape.
- Inflation also returns to the spotlight, with the CPI report pushed to Friday, February 13. Overseas, the European Central Bank held policy rates steady for a fifth consecutive meeting, keeping its key rate at 2.0%. The decision came after eurozone inflation fell to 1.7%, undershooting the central bank’s 2.0% target.
- Equity markets saw wide dispersion last week. Rallies on Monday and Friday offset sharp mid-week declines, particularly in technology. Performance diverged meaningfully across indexes, as the Dow rose 2.5%, the S&P 500 declined modestly, and the NASDAQ fell -1.8%. Tech stocks tend to be more sensitive to swings in market sentiment, given that they typically trade at higher valuation multiples.
Week in review
Markets had a volatile week despite a relatively light economic calendar. Monday kicked off on a strong note as U.S. stocks moved higher following a better-than-expected ISM Manufacturing report, which returned to expansion territory for the first time in a year and showed broad strength across new orders, production, and employment. Tuesday saw equities drift lower despite limited macro news. Interestingly, more stocks within the index finished higher even as headline returns turned negative. Overseas, Indian equities rallied after a trade deal with the U.S. reduced tariffs on Indian goods. Selling resumed Wednesday, led by Tech, even as ISM Services remained unchanged and in expansionary territory. Once again, more underlying names were up despite the index being down, offering another signal of broadening participation beneath the surface. On Thursday, selling pressure expanded beyond Tech as job openings declined sharply and initial jobless claims rose, pointing to a cooling labor market. Stocks rebounded Friday as consumer sentiment rose to a six-month high. The Dow recovered earlier losses to finish at a new all-time high, while broader markets closed modestly lower.
Spotlight
We are now more than halfway through the Q4 earnings season, and results have been solid. 59% of S&P 500 companies have reported, with 76% delivering EPS above estimates. While this is slightly below the five-year average, it is in line with the ten-year trend. On an aggregate basis, earnings are running 7.6% above expectations, in line with recent history. Earnings growth remains the primary driver of long-term equity returns, as rising profits support higher share prices and company value over time. The blended earnings growth rate for the quarter stands at 13.0%, up from 11.9% last week and 8.3% at the end of Q4. If this pace holds, it will mark the tenth consecutive quarter of earnings growth and the fifth quarter of double-digit growth for the index. Earnings growth has been broad, with nine of eleven sectors reporting gains. Information Technology is leading the way, posting earnings growth of 30.4%, followed by Industrials and Communication Services. Consumer Discretionary and Health Care are sectors reporting declines, with Consumer Discretionary down at -0.9%.
Markets
Sectors
Style & Market Cap
Sources
Institute for Supply Management, Institute for Supply Management (ISM) Purchasing Managers Index (PMI) Manufacturing Report, retrieved from ISM, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/January/
2. ISM Services
Institute for Supply Management, Institute for Supply Management (ISM) Purchasing Managers Index (PMI) Services Report, retrieved from ISM, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/January/
3. JOLTS Report (Job Openings)
U.S. Bureau of Labor Statistics, Job Openings and Labor Turnover Survey, retrieved from U.S. Bureau of Labor Statistics; https://www.bls.gov/jlt/
4. Jobless Claims
U.S. Department of Labor, Unemployment Insurance Weekly Claims, retrieved from U.S. Department of Labor; https://www.dol.gov/ui/data.pdf
5. Consumer Sentiment
Surveys of Consumers, University of Michigan Consumer Sentiment Index Summary, retrieved from University of Michigan, https://www.sca.isr.umich.edu/
6. FactSet Earnings
FactSet Earnings Insight, retrieved from FactSet, https://insight.factset.com/topic/earnings
Market Data
Morningstar Direct using Morningstar Indices
Authors:
Anthony Silva, CFA®
Senior Director of Strategy Management
World Investment Advisors, LLC