Week in Review
Stock prices rose last week on the back of continued leadership from the NASDAQ Composite, which climbed 2.6% to push its year-to-date gains to 11.7%. The S&P 500 Index rose 1.9%, and the Dow Jones Industrial Average, which has lagged so far in 2023, rose 1.75%. Crude oil volatility continued, as it jumped 4.4%. For the year, it’s relatively unchanged. Gold rose into positive territory for the year, while Bitcoin dropped 5.4%. Interest rates rose, and the US Dollar Index declined.
Layoff announcements have filled the newswires of late, but that hasn’t seemed to dampen the US labor market. In fact, jobs growth during January surged to more than 500,000, the highest level in six months. We’ll see whether that strength continued in February. The Bureau of Labor Statistics will release their latest payrolls data on Friday, where investors will be watching for signs that the Federal Reserve’s war on inflation is starting to take effect. Another strong report would likely raise the odds of a 0.50% hike at the Fed’s March meeting. Today, markets are pricing in expectations of a more mild quarter-point hike instead.
Earnings Expectations and Valuation
The equity selloff in 2022 was not driven by a deterioration in corporate earnings. Though stock prices dropped well over 20% from their peak to trough, expected future earnings remained stubbornly high. That divergence pushed the S&P 500 forward price-to-earnings ratio from more than 20x (a level previously seen only during the late-1990s) to 15x (a level in-line with historical averages).
So far, 2023 has been the opposite experience: stock prices are rising, but earnings are not. In fact, consensus expectations for future earnings are falling. At the beginning of the year, analysts expected 7% EPS growth in 2023. Now they expect earnings to decline. The result is that valuations are elevated once again. The S&P 500 currently trades at a forward multiple of more than 18x.
The labor market will be in focus this week, with the BLS announcing February jobs data on Friday. ADP’s estimate of jobs growth arrives on Wednesday morning before the opening bell, followed by January job openings a few hours later. The final estimate for January durable goods orders is released on Monday morning. On Tuesday and Wednesday, Fed Chair Jerome Powell will have ample opportunity to reshape expectations for the upcoming FOMC meeting, when he testifies in front of the Senate Banking Panel and the House Financial Services Committee.