Wentz Weekly Insights
Big Tech Highlights Earnings, But Also Is Driving All the S&P 500 Gains

Stocks managed to squeeze out a 0.87% gain last week with the mega cap names leading the way in a week that involved very mixed earnings reports. More companies beat expectations than what was expected, as expectations coming into this earnings season were very low amidst a list of worries. This resulted in an improving earnings picture for the first quarter. The consensus now sees earnings declining by 3%, as opposed to the 6% decline that was expected two weeks ago. In addition, full year earnings ticked higher because of the beat rate along with not as bad forecasts for the full year. It is a welcoming trend to see, but there is still about 45% of S&P 500 companies left to report Q1 results.
Outside of March’s two week regional bank-driven turmoil, stocks have experienced very low volatility. The volatility index, or VIX which measures equity volatility, closed below 16 again on Friday and despite more banking fears to start the week with First Republic the third bank this year to fail, the New York Stock Exchange saw its lowest volume day of the year on Monday. Investors became accustomed to days with stocks moving at least 1% in either direction for much of 2022 and some of the first part of 2023, but the full month of April saw just two days where stocks moved over 0.6% in either direction, according to Barron’s.
Barron’s also noted the VVIX, a volatility index of the VIX itself, was up 25% in a week and reflects volatility in the volatility index. It notes historically when the VIX is at lows while the VVIX is at highs at the same time, the S&P 500 has seen negative short-term returns followed by a spike in the VIX. Over the past two years, when volatility has reached these levels, it has been accompanied by a short term peak in stocks.
The rise in the major indexes is also a result of a select few names performing well year-to-date after struggling most of 2022. Our calculations show, through Friday, the top ten highest weighted names in the S&P 500 (companies like Apple, Alphabet, Microsoft, Nvidia, Meta, Tesla) have returned an average of 33% this year and have made up 8.94% of the S&P 500’s return, almost exactly the same return of the S&P 500 itself, in other words, the top ten names in the index have generated all of the index’s return. Conversely, the average stock, measured by the S&P 500 equally weighted index (where all stocks in the index get an equal weight) is up 3.5% this year. While the indexes are higher, there are still many reasons to be skeptical of the recent rally.
Meanwhile, Bureau of Economic Analysis GDP data shows the US economy grew at a 1.1% annualized rate in the first quarter, almost half the 2.0% growth expected. There was both good and bad in the data. The good news is the consumer remains resilient. Consumer spending saw its fastest growth in several quarters, rising 3.7% in the quarter (thanks to a strong January!) and contributed 2.5% to GDP. However, this was due to a large 45% increase in vehicle sales. Housing remains in a recession and was a contractor for the eighth consecutive quarter while business investment eked a small gain. Net exports generated a small decline as exports grew 4.8%, but not enough to keep up with imports. Lastly, inventory growth slowed more than expected and was a 2.3% detraction to GDP. This is negative for the first quarter but could be a positive looking forward as businesses may look to restock sooner than expected. The consumer was stronger than expected but the concern is that is very unlikely to continue at that pace.
While GDP was positive in the first quarter, it is looking less likely to be the case for the remainder of the year as recession worries build.
This week, markets will be focused on another 120 or so S&P 500 companies reporting Q1 results, labor market data, and the Federal Open Market Committee’s third meeting of the year. Markets are widely expecting another 25 basis point increase to the federal funds rate (bringing the new range to 5.00% – 5.25%) but will be looking ahead for any hints of concerns from the Fed in Chairman Powell’s press conference after the announcement Wednesday afternoon.
Week in Review:
Markets started the week on a quiet note, waiting for direction with a busy week of economic data and earnings reports. Stocks traded in a very narrow range during the session, continuing the recent trend of low volatility. Treasuries were higher as yields fell slightly with the 10-year yield at 3.51% while the S&P 500 rose 0.09%.
Tuesday saw several positive earnings reports from McDonald’s, PepsiCo, and GM, but markets still moved lower over weak results from UPS and with Frist Republic Bank was back in the spotlight after reporting earnings that were severely pressured and a 40% decline in its deposits as customers scattered to take funds out of the banks after the failure of Silicon Valley Bank. In political news, Biden made the official announcement of his reelection campaign while the Republicans debt ceiling package continued to make headlines, meantime markets still wait for the X day when the government will run out of money. Economic data was mixed with consumer confidence lower than expected on weakening consumer expectations while new home sales saw a better than expected 10% increase in March. Volatility picked up with stocks seeing the first move of at least 1% in either direction as the S&P 500 fell 1.58% while the 10-year Treasury yield fell 11 bps to 3.40%.
Better than expected earnings results from tech names like Microsoft, Alphabet, and Roku had stocks starting on a positive note Wednesday. Data on durable goods orders was solid but it was entirely from aircraft orders. Core orders were a disappointment. Republicans came closer to finding full support for the debt ceiling bill after tweaking Wednesday. Early morning gains were unable to be held with stocks turning lower in the afternoon finishing near the lows of the session. The S&P 500 finished down 0.38% with 82% of stocks down, while the tech heavy NASDAQ finished up 0.47% as technology was the only sector finishing positive.
Stocks were off to another positive start to the day on Thursday after the House passed the Republicans bill to raise the debt ceiling and after another round of earnings reports, positive results from Facebook parent Meta and industrials like Caterpillar and Honeywell driving stocks higher. In the morning, GDP came in at a lower than expected 1.1% in Q1 while jobless claims fell slightly. Meanwhile, Treasuries fell with yields moving higher after a strong start to the week on growth worries. Stocks finished the day strong with all sectors higher and the S&P 500 gaining 1.96%.
Markets started weaker on Friday after Thursdays strong rally with weak economic data coming out of Europe overnight and weak guidance from Amazon showing its cloud service growth may be decelerating faster than expected. Meanwhile, in the US, consumer spending and income figures for March were in line with expectations with incomes growing 0.3% and spending flat in the month. At the same time banking stocks were of concern again after reports US regulators were heading rescue efforts for First Republic Bank. Stocks rose by 0.83% with Treasury yields falling across the curve.
For the week, Treasuries saw a decent move higher as yields fell across the curve – the 2-year fell as far as 3.85% before finishing the week at 4.01% while the 10-year yield fell 16 basis points settling at 3.42%. Oil fell 1.4%, finishing down for the second consecutive week and fell in April for the sixth consecutive monthly loss as there are increasing concerns about the high volumes of Russian crude oil finding its way to the market along with continued concerns on economic growth. Meanwhile, stocks were choppy but traded based on the incoming earnings reports which were quite mixed. The major US indices finished as follows: NASDAQ +1.28%, S&P 500 +0.87%, Dow +0.86%, Russell 2000 -1.26%.

Recent Economic Data

It was a crowded week of economic data, with the latest batch quite mixed and continuing to reflect a slowing economy. Home prices continue to decline but are on a very different path on the West coast compared to the Southeast, manufacturing activity remains very weak, first quarter economic growth was below consensus expectations but upside was driven by the important consumer spending category, income growth is slowing, inflation is still too high with latest data showing more inflationary pressures than expected, while consumer’s expectations on the economy continue to deteriorate. More detailed breakdowns below:
  • Home prices, according to the S&P Case-Shiller home price index, experienced a 0.2% increase in the month of February, snapping a streak of seeing month over month declines for seven consecutive months. Home prices are now down 4.9% from their peak in June 2022. Over the last 12 months the index shows home prices are up just 2.0% after record increases this time last year. S&P says the February results were interesting because of the “stark regional differences.” Miami and Tampa continue to see home prices rise at the fastest pace, up 10.8% and 7.7% respectively over the past 12 months, while results from west coast cities are seeing sharp year-over-year declines. San Francisco home prices are down 10.0% and Seattle down 9.3% over the same period. Cleveland prices remain in the middle, rising 3.9%.
  • Sales of newly constructed homes unexpectedly rose 9.6% in March to a seasonally adjusted annualized rate of 683,000 homes. It was a large jump in new home sales, which is typically more volatile month to month versus sales of existing homes. Sales of new homes are still down 3.4% over the past year and down sharply from the post-pandemic high of 1.036 million in late 2020. The median sales price rose again as the number of new homes for sale remains at very low levels. The median sales price was $449,800, rising 3% in the month and from a year ago. The supply of new homes was unchanged in the month and up 5% from last year.
  • Orders of durable goods increased 3.2% in March, much higher than the 0.9% expected, suggesting a solid month of new orders for factory hard goods. However, the details of the data show orders may not be as strong as the headline number suggests. Most of the increase came from transportation equipment, more specifically commercial airplanes, which rose 78% in the month (this tends to be a very volatile category due to the high costs of airplanes – it was down over 60% the first two months of the year). The more important figure, and the one that goes into the calculation of GDP is shipments of non-defense capital goods excluding aircraft, which excludes transportation and other categories, declined by 0.4% in the month.
  • The number of unemployment claims filed the week ended April 22 fell 16k to 230,000. The four-week average fell slightly to 236,000. The number of continuing claims was 1.858 million, down slightly from the prior week with the four-week average up 10k to 1.836 million.
  • The national compensation survey, also known as the employment cost index, showed labor costs increased 1.2% in the first quarter, slightly higher than the 1.0% increase expected and accelerating from the 1.0% increase in Q4. Both wages/salaries and benefits increased 1.2%. Over the last 12 months labor costs have increased 4.8% driven mostly by a 5.0% increase in wages/salaries along with a 4.5% increase in benefits.
  • Bureau of Economic Analysis data shows the US economy grew at just a 1.1% annualized pace in the first quarter of 2023, lower than most economists’ estimates of around 2.0%. Of the categories that make up GDP, the increase was driven by consumer spending, exports, government spending, and nonresidential fixed investments while detractors from growth included inventory growth, residential spending and imports. Consumer spending remained resilient in the first quarter, rising 3.7% and contributing 2.5% to GDP. Spending was driven by a large increase in goods, specifically a 45% increase in vehicles and parts, and to a lesser extent services. With the housing market in a recession, residential investment fell another 4.2% for the eighth consecutive quarter of declines, although a slower decline than previous quarters, while nonresidential investment (businesses) rose 0.7%. Government spending increased 4.7% and contributed 0.8% to GDP. A 4.8% increase in exports and a 2.9% increase in imports resulted in net exports contributing 0.1% to GDP. A decline in inventory growth contributed -2.3% to GDP as businesses see less need to restock shelves as things slow. The 1.1% growth is positive but may be the best growth we see in 2023. Also important, the GDP price index increased 4.2%, accelerating from the 3.7% increase in the fourth quarter, while the core index excluding food and energy prices rose 4.9%, up from 4.4% in Q4.
  • The Bureau of Economic Analysis data on personal income and outlays shows income growth slowed while consumer spending was flat in March.
  • Personal income in March grew 0.3%, slightly higher than the 0.2% expected, with the wages/salaries category growing 0.3%, both matching February’s increase. Compared to a year earlier, wages/salaries are up 6.3% which is now growing at a faster pace than inflation meaning workers are now seeing real wage growth.
  • After starting the year strong, consumer spending has slowed over the past two months and in March was unchanged as expected. Spending on goods declined 0.6% while spending on services is still strong after increasing another 0.4% in March. Over the past 12 months consumer spending has increased 8.2% with goods spending up 3.4% and services spending up 9.5%. An interesting note, personal interest payments (which excludes mortgage payments) are up 61% over the past 12 months as interest rates have soared and consumer borrowing has increased. The personal savings rate increased slightly to 5.1%, up from 4.8% in February and the low of 3.0% last September, but is still below the historical average of about 7.5%.
  • The PCE index, the Fed’s preferred measure of inflation, rose 0.1% in March as expected, with core prices that exclude food and energy up 0.3%. Compared to a year earlier the index is up 4.2%, a sharp slowdown from 5.1% in February, but core prices remain sticky with the index up 4.6%, higher than the 4.5% expected. We think the Fed will keep its focus on this number, and with it remaining over double its target, see another rate increase this week as on the table.
  • The Conference Board Consumer Confidence Index suggest consumers feelings about the economy deteriorated in April, with the index falling 3 points to 101.3. Thoughts on the current environment remain solid with the present situations index up 2 points to 151.1 while expectations continue to decline with the index falling another 6 points to 68.1. The expectations index has remained below 80, a level typically associated with recessions, for 14 of the past 15 months. The survey was taken about three weeks after the bank failures in March.
  • Consumer sentiment was unchanged in April compared to the beginning of the month, according to a survey of consumers in the University of Michigan’s consumer sentiment survey. The index was unchanged at 63.5 while the current conditions index fell slightly from 68.6 to 68.2 and the expectations index relatively unchanged at 60.5, all low levels reflecting a recessionary environment. The expectation on one year inflation was 4.6%, a jump from 3.6% in the March survey (though unchanged from the beginning of April survey), and the highest in several months. The five year ahead inflation expectation was 3.0%, a slight uptick from 2.9% last month and back at 3.0% for the first time since November.
  • Money supply in the US economy declined by 1.2% in March, which sounds like a small decline but is a massive drop in a short period. The money supply is down 4.0% from a year ago and 4.1% from its peak in June 2022. Money supply is important because it saw a massive and record breaking 40% increase during the pandemic years and is what triggered 40-year highs in inflation. A declining money supply should mean inflation will be coming down, but that will take a while to work through the economy and will have consequences for economic growth.

Company News

There was a lack of company specific news outside of the big round of earnings reports where big tech was mostly better than expected. Disney remained in the headlines with its battle against the state of Florida while Microsoft had its deal to acquire Activision Blizzard blocked, Meta announcing a reorganization, and First Republic Bank the third large bank to fail this year.
  • 3M announced in conjunction with its earnings report it would restructure its business that would include the elimination of 6,000 additional jobs. It said the plan would reduce the “size of the corporate center of the company, simplify supply chain, streamline 3M’s geographic footprint, reduce layers of management, and further align go-to-market models to customers.” It expects pre-tax savings of $800 million.
  • Disney said it has filed a lawsuit against Florida’s Governor Ron DeSantis accusing him of using his political position to hurt the company in a “targeted campaign of government retaliation.” Disney and DeSantis have been in a battle over Disney’s special treatment of its own taxing district.
  • UK antitrust regulators, the Competition and Markets Authority (CMA), said it will block Microsoft’s proposed acquisition of Activision Blizzard. CMA said Microsoft’s proposed solution to satisfy regulators failed to effectively address the concerns in the cloud gaming sector, with Microsoft already having strong advantages in cloud gaming with market share between 60%-70%. CMA says the combination would “harm current and emerging cloud gaming competitors by withholding Activision games from them.”
  • San Francisco based Frist Republic Bank, which faced similar issues as Silicon Valley Bank and Signature Bank, had its assets seized by US regulators early Monday morning in the second largest bank failure in US history, even larger than March’s Silicon Valley Bank collapse. Regulators agreed to sell the operations of First Republic to JPMorgan shortly after. JPMorgan will receive all of First Republic’s $92 billion in deposits and most of its assets which includes over $170 billion in loans and $30 billion in securities. First Republic reported last week in its earnings report that it lost 41% of its deposits in the first quarter, with deposits falling to $104 billion from $176 billion, with a majority happening in a short period after the two bank failures in March.

Other News

  • The Federal Reserve released its report on the collapse of Silicon Valley Bank which it called a textbook case of mismanagement. It said the Fed’s supervisors failed to take forceful action to address the growing issues at the bank from not seeing the extent of the vulnerabilities as the bank grew and not taking sufficient steps to ensure it fixed those problems quick enough, working too deliberatively to build evidence before forcing action. It said it should toughen the rules on the industry to prevent these problems in the future. Regarding the bank itself, the report said the bank and its management team failed to manage basic risks of interest rates and liquidity.
  • In a video titled “Freedom” President Biden announced his reelection campaign. Meanwhile, Arkansas Governor Asa Hutchinson announced he will run for the Republican candidacy.
  • The debate on the issue around the debt ceiling is heating up. House majority Leader Kevin McCarthy agreed last week to make changes to the House Republicans bill to increase the debt ceiling (and reduce spending) by making changes around biofuel subsidies and work requirements to win support of several Republican holdouts. Mid-week the House took up and passed the bill, putting pressure on Democrats with business groups and some in Democrats in Congress calling on Biden to negotiate with House Speaker McCarthy. Over the weekend, Senate Majority leader Schumer announced the Senate committees plan to hold hearings regarding the debt ceiling and the bill passed by the House. The so called “X day” is coming closer and the Treasury is expected to announce at any time a more specific day in which the US government will run out of money to cover its bills.

The Week Ahead

It will be another busy week, full of earnings reports, more important economic data, and a FOMC meeting. The headline for the week will be the Federal Reserve’s third Federal Open Market Committee meeting of the year with the policy announcement coming Wednesday at 2:00, which will be followed by Chairman Powell’s press conference. There is a wide expectation the Fed will raise rates by 25 basis points to a new range of 5.00% to 5.25%. The bigger question is what is in store for the remainder of the year and investors will hope to get answers at the presser. We will receive several more data reports on the labor market including job openings on Tuesday, ADP’s employment report Wednesday, jobless claims Thursday, and the DOL’s employment report on Friday. The current expectation is 180,000 jobs were added in April, continuing the recent streak of job gains and wages consistent with a 0.3% monthly increase. Elsewhere, we will see manufacturing data with the PMI and ISM manufacturing survey results as well as construction spending for March on Monday. Tuesday will include factory orders for March and April vehicle sales. Thursday will see trade data along with the first estimates on first quarter productivity and labor costs. The earnings calendar remains crowded with another 24% of S&P 500 companies set to report Q1 results. Notable results will come from Sofi on Monday; AMD, Pfizer, Starbucks, Ford, Uber, BP on Tuesday; CVS, Qualcomm on Wednesday; Apple, DraftKings, Shopify, Shell, Expedia, Anheuser-Busch on Thursday; and Warner Bros. Discovery, Dominion, and FuboTV on Friday. On Wednesday investors will also be focused on the Treasury’s refunding announcement where it will announce its funding needs for the next two quarters and upcoming Treasury offerings. Investors will be looking for the “X date” or when the Treasury will run out of money.