The week ahead: A very early gauge of earnings season as pound sinks

The market remains in a mixed mood as we start a new week. Better than expected US bank earnings, with JP Morgan, Wells Fargo and Citigroup all reporting better than expected earnings throughout the recent period of banking turmoil has helped to lift the mood for financials, however, the dollar is stronger and yields are higher, highlighting how themes can change rapidly in the current environment. Futures markets are predicting a stronger open for US stocks at the start of a new week, and the first week in two weeks for Europe that hasn’t been shortened by Easter holidays. Although US stocks closed broadly lower on Friday, it was the banking sector’s turn to shine, with the financial index rising more than 1% at the end of last week. JP Morgan’s share price rose more than 7.5% on Friday, as the market digested news that the US banking giant posted record revenues at the start of 2023.

Digging a bit deeper into the results, it’s easy to see why the market weas happy: revenue of $39.34bn, adjusted EPS of $4.32 per share, nearly 90 cent higher than expected, with profits jumping more than 50%. What is more impressive is the fact that the bank is still benefitting from the Fed’s interest rate increases, which JPM said had boosted net interest income this year by $81 billion, about $7bn more than expected. At this late stage of the Fed’s hiking cycle, when we are thought to be near the Fed’s terminal rate, that is impressive. However, to counterbalance the good news, JPM has seen a 7% total decrease in deposits from a year ago, as people look to benefit from higher yields elsewhere such as money market funds. Although this trend reversed in Q1, that is largely down to the regional and medium-sized banking sector turmoil that triggered a large inflow of deposits to systemically important banks. Overall, banks in the US have been slow to raise interest rates for savers, to protect their margins, and this could have damaging effects down the line even if it is not impacting the bottom line of the likes of JPM in Q1.

We need to know if we can use the recent good news from the banks to extrapolate what it means for the rest of Q1 earnings season. FactSet note that at this early stage, earnings are off to a strong start, although that is partly because the bar was low. Both the number of these earnings surprises and the magnitude are above their 10-year averages, according to FactSet, which is impressive. On average so far, companies are reporting earnings that are nearly 8% above expectations, which is also above the 10-year average, although slightly below the 5-year average. Even so, analysts are still expecting an earnings decline for Q1 2023 and Q2 2023. Thus, while it is good news that earnings season is off to a good start, there is still a long way to go, and if earnings falter then it is hard to see how stocks can continue to outperform in Q2 and beyond.

For now, however, we are in a risk on mode, and we think that stocks can pick up at the start of a new week. It is worth noting that we would be wary of tech. It has undoubtedly had a wonderful start to 2023, however, recent gains in tech companies’ stock prices, could work against the sector. If earnings disappoint then we could see a re-evaluation of tech, with the sector starting to look expensive. Thus, it is no wonder that the overall US market fell at the end of last week, as investors re-evaluate their tech stock positions and start to favour top performing banks. If that happens on mass, then expect some declines for the overall market, since tech has dominated the rally in US stocks since the start of the year.

Elsewhere, fundamental data is also worth watching this week. Markets are expecting a strong reading from Q1 GDP data from China, which could help propel the Cac 40 French index to new heights after LVMH results propelled the index to a record high at the end of last week. The signs point to a strong GDP report, which could boost the “China reopening trade”, which has got off to a wobbly start. Exports from China rose by 15% YoY in March, which beat analyst estimates. Average analyst estimates for Q1 GDP is for a reading of 3.9% compared to last year, however, some banks are expecting a figure closer to 5%, which would be a large boon to global growth and to global stock markets.

Elsewhere, we will be watching UK CPI data to see if we will get a decline in March, alongside other major economies. Analysts expect headline prices to drop to 9.8% YoY in March, with core prices falling back after a rise in February, from 6.2% to 6%. This is interesting, in the US and Europe headline prices are falling more rapidly than in UK, however, core prices are above headline prices in the US, whereas that is not the case in the UK. Does this show a major issue with the UK’s energy and food supply chains, or does it suggest that wages and other “sticky” elements of inflation in the UK aren’t as strong as in the US or Europe due to the weakness in our economic growth? The answer is probably somewhere in the middle, but either way it may not be great for the pound. GBP/USD is down at the start of trading on Sunday night, and it suffered on Friday as risk aversion and higher US yields gave the dollar a boost. Weaker CPI, especially if we get a weaker core CPI reading, could weigh on the pound further, with $1.2375 key short term support in the short term, ahead of $1.2280 from 3rd April.