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By Alex Eule
| Monday, May 2 All
In a Day's Trading. Depending on when you checked your portfolio
today, you might have had a very different view of the stock market. At 10:30
a.m., the Dow Jones Industrial Average was
up 248 points. At 2:30 p.m., it was down 527 points. From there, the Dow
rallied into the close, finishing up 84 points. Got all that? The volatility tracks various market
debates, with some analysts seeing an inflation peak and others seeing a
persistence in high prices. Or, some expecting an aggressive Federal
Reserve monetary policy to force the economy into a recession
with others thinking the Fed can still pull off a soft landing. Then there's corporate earnings, which could
be used to defend an optimistic or pessimistic take on stocks. With more than half of the companies in the S&P
500 having reported their first-quarter results, there's good
news and bad news. Of the companies posting numbers thus far, FactSet notes
that 80% have reported
earnings above estimates, which is slightly above the five-year average beat
rate of 77%. But, taken in aggregate, the beats are smaller, with
earnings coming in 3.4% above
estimates, which is below the 5-year average of 8.9%. Based on actual reports -- and the estimates
of reports still to come -- the S&P 500 is currently on track to grow
earnings 7.1% in the first quarter. Here too, it's a good news/bad news
situation. The 7.1% is better than what analysts expected at the end of
March, but it would still mark the index's slowest quarterly growth since the
end of 2020. This week, another 160 S&P 500 companies
report earnings. Now the question is when earnings could start to provide
some support for stocks. The S&P 500 currently trades at at 18.1
times expected earnings for the next 12 months. That could be either cheap or
moderately expensive based on your view of history. Over the last five years,
FactSet notes that the index has traded at 18.6 times, but over 10 years, the
forward price-to-earnings multiple is a cheaper 16.9. Wall Street analysts, not surprisingly, see
plenty of value for stocks at current levels. An average of every analyst
price target pegs the S&P 500's value at 5,221, per FactSet. That's 26%
above the index's closing value today. Perhaps the most notable number in today's
trading, came not from stocks but from the bond market. The 10-year Treasury
yield briefly crossed 3% for the first time since 2018. It ultimately closed
at 2.995%, still the highest level since Nov. 30, 2018. The significance goes
beyond being a nice round number. "The 10-year note now offers a
positive inflation-adjusted or 'real yield' for the first time since the
start of the Covid-19 pandemic," my colleague Alexandra
Scaggs wrote
today. That real yield is calculated by taking the
current yield and subtracting expected inflation. Currently, investors are
counting on an average inflation rate of 2.8% over the next decade, Alex
notes. And here's the bottom line: Negative real yields in safe markets like
Treasuries have pushed investors into riskier markets for returns, but as the
Federal Reserve tightens monetary policy to fight inflation, there is less
reason to take risk. In their Wednesday decision, Fed officials are expected
to raise rates by half a percentage point, twice the size of their March rate
increase. They will also likely announce plans to start shrinking their
balance sheet. As yields rise, stocks are looking less
attractive. It's one headwind that's unlikely to ease anytime soon. |
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DJIA: +0.26% to 33,061.50 The Hot Stock: EPAM
Systems +8.9% Best Sector: Communications
Services +2.8% |
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