The stock market seems to have finally caught the winter doldrums, with the Dow Jones Industrial Average dipping 0.2%, the S&P 500 index falling 1.1%, and the Nasdaq dropping 2.4% in the past week. Although the most optimistic investors would acknowledge that January’s fast pace couldn’t continue indefinitely, the recent market performance has left many feeling uneasy.
The market has been betting on a soft landing for the U.S. economy, which was supported by early economic data showing a slowing inflation rate and a still-strong job market. However, the lack of meaningful data in the past week has left investors feeling uncertain. As Paul Hickey, co-founder of Bespoke Investment Group, says, “We’ve had such a strong start…it’s as good a time as any for the market to take a break when there’s nothing to latch on to.”
Investors have had to rely on corporate earnings to fill the void, but these have been lackluster. With more than two-thirds of S&P 500 companies having reported fourth-quarter results, just 69% are topping earnings estimates, which is below their average of 76% over the past four quarters. The average beat amount of 1.6% is also less than the typical beat of 5.3% in the same period. Credit Suisse predicts that earnings per share are set to fall by 1.4% year over year, which would be the first quarterly drop since Q3 of 2020.
The profit trend doesn’t seem to be improving either, as consensus first-quarter estimates for S&P 500 companies have fallen 4.5%, compared to the average 2.6% historical decline. The downbeat tone of the Conference Board’s survey of corporate management’s confidence levels and ISM manufacturing contractions suggest that earnings estimates will continue to fall. Tan Kai Xian of Gavekal Research writes, “If corporate earnings deteriorate further, the outperformance of U.S. cyclical stocks is unlikely to last.” He advises investors to shift back toward defensive stocks, as the early rally in risky assets may not last.
Some riskier assets are already feeling the pressure, with Bitcoin experiencing its worst three-day stretch since November, and the Invesco S&P 500 High Beta ETF falling 1.6%. On the other hand, consumer staples will have the opportunity to prove their worth as earnings reports from companies like Coca-Cola and Kraft Heinz are due in the coming week. These reports could give a further boost to safe-harbor stocks, especially if tech companies continue to deliver misses.
In conclusion, the recent market performance has left many investors feeling uneasy, as corporate earnings have been lackluster and the future of the economy remains uncertain. The lack of meaningful data in the past week has only added to the uncertainty, making it a good time for investors to consider shifting back toward defensive stocks. The upcoming earnings reports from consumer staple companies could also provide some support for safe-harbor stocks, especially if tech continues to underperform. As always, it’s wise to prioritize safety over returns in uncertain times.