Market Week: April 17, 2023

The week in review

Headline/core CPI: 5.0%/5.6% y/y
Retail sales: -1.0% m/m, -0.8% m/m ex-autos

The week ahead

PMIs
Building permits

Thought of the week

The 1Q 2023 earnings season is underway, with the large U.S. banks releasing results last Friday. Current analyst estimates are tracking operating earnings per share (EPS) of $49.54 ($39.73 ex-financials), representing y/y growth of 0.4% and a q/q decline of 1.6%. This estimate reflects slowing demand offsetting the benefits of easing macro headwinds. Despite improved global supply chains and moderating cost pressures, increased recession risk and weak consumer sentiment weighed on demand, and a persistently strong dollar likely limited foreign sales.

At the sector level, these estimates suggest a change in leadership. The boost from the energy sector looks set to fade due to normalizing commodity prices. The current estimate of 7.6% y/y earnings growth for the sector represents a sharp deceleration compared to recent quarters. In other cyclical sectors, materials earnings will likely contract, while resilient demand for air travel and commercial services should support industrials. The tide may also turn for financials, as moderating loan loss provisions should contribute to positive earnings growth.

That said, slowing loan growth, moderating net interest margins and weak M&A activity remain headwinds. The growth sectors are facing headwinds of their own, as falling hardware demand and less advertising and discretionary spending should weigh on information technology and communication services, respectively. Lastly, persistent demand for services and core goods should support both consumer sectors, with consumer discretionary specifically benefiting from China’s reopening as well as strength in travel and lodging.

As the U.S. economy appears to be edging closer to a recession, current earnings estimates remain too high. While the prospect of lower interest rates has supported equity markets so far this year, volatility may pick up as earnings estimates are revised down.

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