In a perverse turn of events last week, large-cap banks reported Q1 results on Friday morning and largely beat consensus expectations for EPS and revenue growth, but fell victim to a dramatic selloff after markets opened. Three of the largest banks reporting–JPMorgan Chase, Citigroup and Wells Fargo–all lost meaningful ground on the session, and in the process weighed down the financial sector and broader market. Solid earnings results, coupled with revenue growth and constructive guidance, “should” lead to rising prices, but that was not the case on Friday. In the case of the banks reporting on Friday, and the sector, generally speaking, investors have been very optimistic in regards to performance expectations for several quarters, if not years; even though Q1 results on Friday did justify further price appreciation, investors moved on from the trade.Several tailwinds have fueled the positive expectations for the sector: scaled back costly and redundant regulations, rising interest rates, increasing net interest margin, tax reform, and a resurgent economy. Investor consensus on the space is that though Q1 results have thus far been solid, how much further can prices and valuations rise in the near term?
Additionally, it appears as those tailwinds are being at least partially offset by rising expenses. Those expenses may be the result of M&A activity, consolidation, a competitive marketplace, strategic growth and investment, or any number of factors, including increased costs associated with inflation and wage gains. That said, the tide is, in fact, rising for banks. All of those factors that investors have expected to push prices and performance over the past several years have been playing an increasingly positive role in the significant rise in prices enjoyed by the banking sector recently. In fact, banking stocks have largely outperformed the broader market by a wide margin over the same period. The reason for the counter-intuitive weakness witnessed on Friday has more to do with the fact that the banking sector has become relatively stretched in comparison to the broader market. Friday was a case of buy on the rumor, sell on the news. The banking sector will continue to provide investors with an ideal vehicle with which to price in continued economic acceleration and growth. The sector simply needs to digest a degree of rotation into other sectors of the market that sport less stretched valuations.
The results of last week’s economic calendar, though largely in-channel, did not provide much meaningful lift to the broader market. NFIB Small Business Optimism Index for March slipped from February’s 107 to 104.7. March’s PPI-FD was 0.3%, less food and energy Y/Y it was 2.9%. Interestingly, the CPI for March was -0.1% versus the prior reading of 0.2%. The FOMC minutes for 4/11 had one significant take away in that the Fed is expecting inflation to achieve 2% target later in the year, but that is not news and does not materially impact the current expectations for timeline tightening. Crude inventories rose 3.3 M barrels in the previous week, but given the recent tightness in supply and the ongoing concern over military action in the middle east, crude prices held their ground. In fact, it would appear as though another leg up in prices is in the offing. Finally, the import and export price data for March was flat: zero. February’s revised reading was 0.3%. In short, the week’s economic data was, if anything, a tad less dramatic than the street was expecting. Additionally, the economic calendar was overshadowed by both earnings and tensions in the middle east.
This week equity markets will again be dominated by Q1 results. Banks will again lead the charge today, and if Friday is any indication of what to expect, we could see some sector weakness there. This week’s economic calendar will feature nine Fed officials speaking. On Monday we receive retail sales and the Housing Market Index; on Tuesday, Housing Starts and Industrial Production; on Wednesday, the Fed Beige Book. Leading Indicators, Philly Fed Business Outlook Survey and Weekly Jobless Claims, round out the week.
It will be a busy week for earnings. BAC, CE, MTB, NFLX, and PNFP will take the spotlight today. On Tuesday, CMA, CSX, GS, IBKR, IBM, ISRG, and UAL will drive the narrative as we move away from banks and into transports and logistics. ABT, AA, AXP, and CCI will provide investors with a broader view of how corporate America and the US economy faired in Q1. On Thursday and Friday, we hear from ABB, BK, BBT, DHR, NVS, and BHGE. Further details are in the Nasdaq Earnings calendar linked in the sidebar.
I continue to expect to see volatility decrease while equity markets post additional, though uneven gains this week. The best case scenario for the bulls remains ongoing and constructive Q1 corporate results and constructive economic data.
Both themes should provide soft support for the market’s attempt to move higher – away from our double bottom, highlighted in yellow, which was confirmed on April 2. That said, markets remain vulnerable in the near term. As evidenced by the chart below, since the double bottom, the rebound staged by the S&P 500 has been relatively anemic. Volume has tapered off, indicated by the arrow in the lower right corner, and price gains have been uneven. Additionally, the 50 DMA is beginning to move dangerously close to the 200 DMA. We have not yet received confirmation that the worst of the correction is over.