1Q23 earnings season "better than feared" contrasts with 2022 "worse than expected." Technology weakness (-1 z-score) likely reverses catalyzed by EPS results.

Be sure to catch our webinar next week on Thu April 27th, where we discuss signs supporting the end of a bear market.

Better than feared is a good thing

There is little macro data this week (and some next week, PCE etc) but markets are closely watching 1Q23 earnings season. As we noted earlier this week (also see our “word of the day” from CNBC on Monday am), we thought the key would be “better than feared”

And while we are still early into results season, 82% of companies are beating and by a margin of 7.6%. So this is better than feared. In fact, since 3/31, 1Q23 EPS forecast has slightly increased by +0.1% to $50.28.

• To me, this means that the earnings recession wallop the bears are expecting has not materialized.

And the conclusions from the Street are also similar to our forecast. Earnings season is “much better than feared”

Netflix is an example. They reported after the close on 4/18 and look at the after-market swing.

• NFLX -0.48%  initially fell 13% on lighter sub adds figures and revs
• but rebounded as the company raised it 2023 FCF guidance and the light revs is somewhat of a timing issue
• one has to appreciate where investor positioning stands when this happens
• if the stock misses on key metrics like subs, but then sees -13% swoon and then swing higher in the after-market, this is a stock where a lot of bad news is priced in

There is a lot of earnings on Wed and Thursday as this calendar shows:

• 20 companies Wed, TSLA 3.29%  among them
• 20 companies Thu, CMA 1.52%  FITB 0.71%  among others

And as shown below, we are in the nadir of EPS recession. The decline in 1Q23 should be the worst YoY decline at -8% and should hopefully improve to -6% in 2Q23. This could mark the bottom.

And revisions downward have slowed as we highlighted earlier this week.

ECONOMIC CALENDAR: Key is inflation, and April so far is “tame”

The only negative data point this month has been the U Mich mid-month April inflation expectation. As we highlighted earlier, this seems like a fluke as prior instances of a 100bp monthly jump were reversed. Wed is Fed beige book, so there will be some macro news.

Key incoming data April

• 4/3 10am ISM Manufacturing Employment/Prices Paid MarchTame
• 4/4 10am ET JOLTS Job Openings (Feb)Tame
• 4/7 8:30am ET March employment reportTame
• 4/12 8:30am ET CPI MarchTame
• 4/12 2pm ET March FOMC MinutesTame
• 4/13 8:30am ET PPI March Tame
• 4/14 7am ET 1Q 2023 Earnings Season Begins Better than feared
• 4/14 Atlanta Fed Wage Tracker MarchSemi-strong
• 4/14 10am ET U. Mich. March prelim 1-yr inflationHawkish
• 4/19 2:30pm ET Fed releases Beige Book
• 4/25 10am Conference Board Consumer Confidence/Expectations April
• 4/28 8:30am 1Q23 Employment Cost Index
• 4/28 8:30am ET PCE March
• 4/28 10am ET UMich April final 1-yr inflation

In fact, incoming data on inflation has been soft since the start of March (the start Feb data) and supports the idea that the “hot” inflation readings in Jan (reported in Feb) was the anamoly.

Key incoming data for March 2023

• 3/7 10 am ET Powell testifies SenateHawkish
• 3/8 10am ET Powell testifies House Neutral
• 3/8 10am ET JOLTS Job Openings (Jan)Semi-strong
• 3/8 2pm ET Fed releases Beige Book Soft
• 3/10 8:30am ET Feb employment report Soft
• 3/13 Feb NY Fed survey inflation exp. Soft
• 3/14 6am ET NFIB Feb small biz survey Soft

• 3/14 8:30am ET CPI Feb Tame
• 3/15 8:30am ET PPI Feb Tame
• 3/17 10am ET U. Mich. March prelim 1-yr inflation BIG DROP
• 3/22 2pm ET March FOMC rate decision DOVISH
• 3/31 8:30am ET Core PCE deflator Feb Tame
• 3/31 10am ET U Mich. March final 1-yr inflationTame

STRATEGY: S&P 500 is at the critical 50% retrace of the entire 2022 bear market decline

We think 1Q23 earnings season will ultimately enable the S&P 500 to push to new highs for the year. YTD up 8% and we see the uptrend intact. In fact, the swoon to 3,800 post-SIVB has since sharply reversed.

Technology could be the winner of results season. Technology is still the strongest sector YTD but has ceded gains, and is up only 11% ex-FANG. FAANG is up 30% YTD, so clearly having a good year.

TECHNOLOGY: -1 Z-score likely reverses post results

Technology stocks have been among the worst sectors in the past 20 days (month) and as the table below highlights:

• -0.98 z-score vs S&P 500 (-1 std deviation weakness) and
• -1 z-score vs Materials, Energy and Financials and close to that for Healthcare
• So Technology has been a source of funds in the past month

But as shown below, it is at critical support. This is a rising trendline (zscore) and we think demand and margins holding up better (our view), will support a rally in Technology stocks.

This same support is seen at pairs of Technology vs Materials, Energy and Healthcare.

• so the logic remains the same
• we see Technology reversing this recent weakness as we move through 1Q23 results season.

STRATEGY: Staying above 200 week moving average = good

The S&P 500 has been above its 200 week moving average for 25 weeks now as shown below. On Oct 12, 2022, the S&P 500 touched this level and has since moved higher.

In fact, as the table below shows, in the 12 instances of crossing above 200 week moving average and staying there for 25 weeks:

• S&P 500 higher in 12 of 12 instances
• for all periods, 1M, 3M, 6M and 12M
• doesn’t this sound like a bull market?

We arrived at “25 weeks” based upon the table below.

• since 1957, there have been multiple crosses above 200 week
• but many failed and led to new lows
• the longest of these “fake recoveries” is 13 weeks
• thus, we looked at 15 weeks as the threshold

STRATEGY: Cyclicals outperforming more than Defensives

We have highlighted the 2-yr relative performance of the major groups below and as shown, the leadership is more cyclical.

• Leading are Tech/FAANG, Energy, some Industrials, Materials and Staples.
• The drags on S&P 500 performance have been Utilities, Financials, Telecoms and Healthcare.
• In other words, the drags have been largely Defensives.
• This is counter to those saying this rally in 2023 is Defensive stocks.

And our base case for April remains a strong >4% rally, following the pattern of “Rule of 1st 5 days.” The Rule of 1st 5 days looks at years when S&P 500 gains >1.4% in 1st 5 days and is negative the prior year.

• This has happened 7 times since 1950: 1958, 1963, 1967, 1975, 2003, 2012 and 2019.
• Based upon those 7 years, April implied gain is +4.2% and was positive 6 of 7 times (only 2012, -0.7%). This implies +175 points, or S&P 500 >4,275 by the end of April.

A gain of 4%, or +172 points would put S&P 500 >4,250 by the end of the month. And we think this would ultimately force a bear capitulation.

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