Themes Coming to Fruition

By Hightower Omaha on April 23, 2024

Week of April 22, 2024

1. Week One of Earnings. At the end of the week, 14% of S&P 500 companies have reported Q1 2024 results. 74% of S&P constituents have reported a positive earnings per share (EPS) surprise, and 58% have reported a positive revenue surprise. The percentage of companies reporting positive earnings surprises and the aggregate number of companies reporting positive surprises are both at their 10-year averages. According to FactSet, current blended Q1 earnings growth is expected to come in at 0.5% y/y, with expectations for 2024 at 11% growth y/y.[1] We continue to believe the above-trend growth of the economy will assist in bolstering earnings and a strong consumer.

Themes we have been discussing, such as housing, a strong consumer and energy, have been validated through earnings, management commentary and increased company forecasts. D.R. Horton’s (DHI) second quarter results reported last week beat expectations, with management raising its full-year guidance for homes closed and revenue. Housing is one of our favorite themes this year, seeing that the U.S. is 5 million homes short and over 5 million millennials are eager to become first time home buyers. The company reported that 57% of homes purchased in the quarter came from first time home buyers, singing towards a strong consumer even with mortgage rates above 7%.

Chart 1: New Home Sales Bottomed and Are Rising, Even Amid 7% Mortgage Rates[2]

Genuine Parts Company (GPC) was the best performing stock in the S&P 500 last Thursday following its earnings release, closing up 11%. The company increased its EPS forecast for 2024 and accelerated its purchasing of independently owned stores, showing its belief in a continuing strong consumer. Its industrialization business is benefiting from nearshoring, a theme we have highlighted previously.

Schlumberger (SLB) continues to gain share in international energy markets, with international revenues up 18% y/y. Management affirmed its prior guidance and target to return $7 billion to shareholders over the next two years. The company’s acquisitions have been a bright spot for its earnings. Thanks to the acquisition of Aker Carbon Capture, its production systems revenue grew 28% y/y. 21 of its 25 international locations grew revenue y/y.

American Express (AXP) beat on all major metrics – EPS, revenue, net interest income (NII) and net interest margin (NIM) – and lowered its provision for credit losses, another indication of a strong consumer. The company noted that U.S. consumers saw 8% greater spend in the quarter compared with the same quarter last year, up 7% overall y/y. Moreover, AXP is focused on younger, higher income consumers, specifically Millennials and Gen Z. Fee-based cards accounted for 70% of new acquisitions in the quarter, with 60% coming from Millennials and Gen Z. The younger generations are also notably using cards more. Customers aged 35 and under use cards at restaurants over 70% more than other age groups in the segment. AXP brought further confidence that the U.S. consumer is well equipped for further spend and activity in a higher rate environment.

2. Market Gauges Show Oversold Conditions. Following back-to-back quarters of double-digit growth for the S&P 500, markets have taken a pause to digest the changing economic outlook – higher growth, stubborn inflation and the likelihood of less Fed interest rate cuts (with a strong possibility that we see no cuts this year). Currently, Fed expectations for 2024 are now below two 25 bp cuts after starting the year at six to seven. Markets are down ~5% from recent highs, and many indicators are showing oversold conditions. As of Friday, only 28% of S&P constituents remained above their 50-day moving averages, down from 84% less than a month ago.

Keep in mind, in the past 16 months the S&P 500 has rallied 30%. For context, the long-term total return for the S&P 500 is 7.7%. It would not be surprising to see further volatility and profit taking.  But what is more important is the underlying rotation in the equity markets – with energy, financial services, materials and industrials all now higher on year-to-date performance versus technology. 

The two market sentiment indicators that we watch are the CNN Fear and Greed Index and S&P Oscillator. The Fear and Greed Index currently sits at 31/100, indicating “fear.”[3] Although not as low as the Covid lows (the index hit ~3 in March 2020), the index is down from 46 a week ago and 70 a month ago (which indicated greed). Any measure below 25 indicates “extreme fear” and is something to keep an eye on. The S&P Oscillator indicates short-term overbought and oversold conditions. Any measure +/- 4.0 generally points towards extreme conditions. As of the end of the week, the oscillator was sitting at -6.0, indicating oversold conditions.

The relative strength index (RSI) is another indicator for overbought and oversold conditions. The index is calculated with a range from 0 to 100, with readings above 70 indicating overbought conditioning and below 30 indicating oversold conditioning. As of Friday, the RSI on the S&P 500 showed 31, indicating near-oversold conditions.

Chart 2: Indicators Showing Oversold Market Conditions[4]

3. Fixed Income. U.S. Treasuries sold-off for the third week in a row following hawkish Fed speak consisting of comments that the central bank will not be in a position to reduce rates until the end of the year, with some members stating rate hikes may not occur until 2025. The U.S. 2-, 10- and 30-year Treasury yields rose by 4, 3 and 2 bps, respectively. High yield spreads widened the most since early January last week following geopolitical tensions and concerns about interest rates staying higher for longer (+23 bps to +369). Muni yields increased by 2-4 bps across the curve.

4. The Week Ahead.

Earnings – Monday: VZ, AMP, NUE; Tuesday: DHR, FI, FCX, GE, GM, UPS, BRK, ENPH, TSLA, V; Wednesday: T, BA, BSX, CMG, F, IBM, META, QCOM, WM; Thursday: AAL, BMY, CAT, MRK, NOC, GOOGL, INTC, MSFT, RMD, TMUS, WDC; Friday: ABBV, CVX, XOM, LYB, PSX.

Economics – Monday: Chicago Fed Index; Tuesday: Building Permits, New Home Sales PMI Composite, Markit PMIs, Richmond Fed; Wednesday: Durable Goods; Thursday: Jobless Claims, GDP, Pending Home Sales; Friday: PCE, Michigan Sentiment.  

[1] Source: FactSet. As of April 19, 2024.

[2] Source: FactSet (Chart). As of April 19, 2024.

[3] Source: CNN. As of April 21, 2024.

[4] Source: FactSet (Chart). As of April 19, 2024.