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Thoughts From Last Week
Source: FactSet, Standard & Poor's, J.P. Morgan Asset Management.
Higher interest rates drove an increase in net interest margins in the financials sector, which despite the ongoing turmoil with regional banks, had a strong earnings season.
Despite slower economic growth, 1Q23 S&P 500 earnings have surprised to the upside, as economic momentum at the beginning of the year supported an expansion in profit margins. With over 90% of the S&P 500’s market cap having reported, profit margins currently stand at 11.8%, a level of profitability that had only been eclipsed once in the pre-pandemic period.
Earnings continue to find support in consumer spending, which accelerated to a q/q gain of 3.7% (SAAR) in 1Q23 due to increases in both goods and services. The strength in services demand has particularly buoyed earnings, with the travel and food services related industries within consumer discretionary and industrials recording significant growth in profits. Additionally, while the decrease in private inventory investment dragged on real GDP growth in 1Q23, this was a positive for earnings, as it confirms companies are successfully working their way through bloated inventories. Elsewhere, higher interest rates drove an increase in net interest margins in the financials sector, which despite the ongoing turmoil with regional banks, had a strong earnings season. Lastly, the cost side of the profit story has also improved. Many of the large tech companies, which are among the index’s largest constituents, are now focused on managing headcount and optimizing capital expenditures, with both initiatives providing downside protection to earnings.
Year-to-date, gains in the equity market have been driven by multiple growth due to the market’s expectations for rate cuts by the end of the year. However, looking ahead, if such expectations prove to be too dovish, any further gains in equities will be dependent on earnings.
Disclosure: Indices mentioned are unmanaged and cannot be invested into directly. The S&P 500 Index, or Standard & Poor's 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.