Equities and the MacroSphere: Pause Time for Upward and Onward
- By John Tierney
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Summary
- Equities are heading into Q2 with a nice tailwind. The Federal Reserve (Fed) is inclined to cut rates, and the economy and labour market are on solid footing.
- Analysts project earnings gains of 8.2% for the S&P 500 (SPX) and 14.8% for the NASDAQ 100 (NDX).
- Still, there are reasons to expect the equity rally to pause for now. Equities are already pricing in a lot of good news. And 2024 earnings gains are backloaded into the second half.
- The coming earnings season will be largely about whether company outlooks validate those earnings projections.
- Only six companies report this week. Most notable is payroll and HR software vendor Paychex, which may provide clues on how Russell 2000 companies view 2024 prospects.
Market Implications
- Expect equities to trade in a narrow range until the good news already priced in starts materializing.
What We Learned Last Week
Equities head into Q2 with a lot of momentum. During Q1 SPX gained 10.2%, NDX was up 8.5%, and the Russell 2000 (RTY) eked out a 4.8% gain after a strong Q4 2023.
Impressive as that rally was, there are indications of more to come.
There is a market-friendly Fed, set to cut rates by mid-year if inflation does not act up. The labour market and a variety of economic indicators portray an economy still in solid recovery mode. And there was enough good cheer in earnings outlooks to feel optimistic about the rest of 2024.
2024 Bottomline – That said, the bottom line for equities is literally the bottom line – earnings.
For 2024, analysts are pencilling in EPS (earnings per share) growth of 8.2% and 14.8% for SPX and NDX, respectively, and a modest 2.4% for RTY. That appears doable for NDX, where earnings have grown steadily over the past year (Chart 1). But SPX and RTY are coming off an extended period of flat-line growth, and the recent earnings season did not generate any upward momentum.
Reality Check Time? – The coming quarter should be a reality check for investors on whether these expectations are reasonable – or will be a tough reach. Looking at projected earnings by quarter, all the major indices are expected to register a quarter-over-quarter decline in earnings (Chart 2). Further, the gains powering the projected year-over-year growth are backloaded in the second half of 2024. It will not be earnings supporting equities during the coming earnings season – it will be whether outlooks seem to be in synch with analyst projections.
We caution that a lot of this news – rising earnings, rate cuts, solid economic growth – is priced in. SPX and NDX P/E valuations based on projected 2024 earnings are near the highs of the past 15 years. In short, investors expect a lot of good things out of 2024.
Until these events (hopefully) start materializing, equities will likely trade in a narrow range and be vulnerable to adverse developments.
Note – we are not bearish on equities but think the upward and on onward rally will likely take a break in coming weeks.
The Week Ahead
It will be a quiet week on the earnings front, with only six companies in our Russell 1000 universe scheduled to report. Probably the most interesting is Paychex Inc. (PAYX), which provides payroll and HR software for smaller and medium-sized companies. Therefore, Paychex should indicate business optimism (or lack thereof) among Russell 2000 companies.
Meanwhile, front and centre will be Friday’s labour market report. We expect Q2 trading to start after this.