Finishing Strong

By Nicholas Jasinski |  Monday, January 31 Unimpressed by Earnings. Stock indexes closed solidly higher today, to finish a sour January on a sweet note. Growth and momentum areas of the market that have born the brunt of recent declines led the bounce higher today. The S&P 500 closed the day up 1.9%, to cut its January loss to 5.3%. The Dow Jones Industrial Average added 1.2%, finishing January down 3.3%. And the Nasdaq Composite jumped 3.4% today, for a 9% loss in January. There's still more volatility ahead. Uncertainty over Federal Reserve policy will remain a pain point between now and mid-March, when the central bank's interest rate-setting committee next meets. Investors know that rate increases are coming this year. It's the speed and scale of those increases that is a topic of debate. In the meantime, stocks will remain sensitive to every suggestive word uttered by Fed officials, monthly economic data, and bond-market projections. Fourth-quarter earnings season is also adding lots of hard data for investors to consider. So far, earnings growth is coming in at 25.3% year over year, according to Refinitiv, with companies in aggregate reporting earnings 4.1% above expectations. That's in line with the long-term average beat rate, but well below the 16% average beat in the previous four quarters. Investors haven't been rewarding winners or losers this earnings season, however. According to data from Wells Fargo’s Chris Harvey, S&P 500 companies that missed Wall Street consensus for earnings per share so far this earning season have dropped by an average of 3% the next day. And those that beat have also declined, by an average of about a quarter of a percentage point. Overall, the average post-earnings reaction has been a 0.8% decline for S&P 500 companies. Fourth-quarter earnings season has been a sell-the-news event, Harvey argues, pointing to concerns that corporate profit margins have peaked. That has been one factor that investors have been rewarding this earnings season. Companies that have reported growing profit margins in the quarter have seen their stocks rise about 1% the next day, on average, with those that beat earnings climbing 1.4% and those that missed slipping 1.6%. With all the concerns about input-cost inflation, pricey supply chain constraints, and hard-to-find labor, companies becoming more profitable have been a rare commodity. In other commodity news, the U.S. price of crude oil added 1.5% today, to close January up more than 17%, at $88.15 a barrel. A reopening global economy demanding more oil and gas continues to be met with a slower ramp-up in supply. OPEC+ has promised only gradual production increases, while U.S. shale producers are emphasizing returning cash to shareholders over boosting volume. The geopolitical wild card of Ukraine-Russia tensions has only added to the upward pressure on energy prices. $100-a-barrel oil prices might not be far off. Next up for energy investors will be Exxon Mobil's fourth-quarter results tomorrow. It's a busy day on the earnings calendar tomorrow: Alphabet, AMD, General Motors, PayPal Holdings, Starbucks, and United Parcel Service are among the many highlights.

 

DJIA: +1.17% to 35,131.86 S&P 500: +1.89% to 4,515.55 Nasdaq: +3.41% to 14,239.88 The Hot Stock: Enphase Energy +13.4% The Biggest Loser: L3Harris Technologies -4.3% Best Sector: Consumer Discretionary +3.9% Worst Sector: Consumer Staples +0.4%