The Week Ahead – Resilient Earnings Defy Recession Risks

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Last week, I was emailing with a client about getting together for a review of her account. She made this interesting comment, “I know things are crazy in the market right now.” Throughout the course of history, there has always been something to worry about, but ironically market volatility has collapsed. There have been just two days where the market moved by +/-2% or more in 2023. By contrast, that number was 46 days in 2022. Indeed, the S&P 500 is set for its narrowest quarterly trading range in decades. 

Things have objectively calmed down – thank goodness. Almost all experts agree a recession is coming this year, so the shock will be if it does not arrive. Due to rampant pessimism, portfolios are defensively positioned. Despite the looming recession the stock market has seen a powerful 17% rally off the October 12^th low. Portfolio Managers caught offsides have been forced into stocks or face career risk by falling even further behind their respective benchmarks. With the S&P 500 now at the high end of its recent trading range of 3800-4200, monitoring of potential catalysts is even more important. Will we see a breakout of that range or a pull-back? The answer to that question will hinge largely on upcoming inflation data and the Federal Reserve’s reaction function.

Nearby recession risk has waned as the recent earnings season failed to confirm our worst fears of an imminent credit crunch. Corporate earnings fell by 3% – this was far better than the consensus estimate of a 7% decline. Further, the Global Purchasing Managers Index is at a 16-month high - higher 5 months in a row. After a firm first quarter GDP report, which was held back by inventories, the Atlanta Fed’s GDPNowcast for the current quarter increased to 2.9%. 

At the end of this week, April's Personal Consumption Expenditure (PCE) index should show that inflation continues to moderate as suggested by April's CPI and PPI for consumption final demand. We expect to see further moderation in rents (1/3^rd of CPI) as the current rents index compiled by ApartmentList fell to just 1.7% annualized in April.

Data Deck for May 22 – May 26: