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Use the Q1 rally to cut stock weight By Investing.com



© Reuters. Dow Jones, Nasdaq, S&P 500 Weekly Preview: Use Q1 rally to cut stock weight

By Senad Karaahmetovic

US stocks fell last week as investors awaited tomorrow’s CPI release and continued to digest comments from Federal Reserve policymakers. The Index (SPX) closed 1.1% lower, the Index (IXIC) dropped 2.4%, while (DJI) had another not-so-smooth week (-0.17%).

The S&P 500 recorded its worst week of the year as some uncertainty and volatility returned to the market. All eyes are on CPI this week, the market seems to be at a crossroads: Continue to increase or correct down?

Focus on CPI

The New York consumer expectations survey is due today before the US Bureau of Labor Statistics (BLS) releases inflation data for January. Overall inflation is expected to slow to 6.2% (YoY) from 6.5% reported in December. On a (MoM) basis, CPI is expected to rise 0.5%.

Core inflation (excluding food and energy) is expected at 5.5% and 0.4%, respectively.

“We are still worried about inflation (in the short term) – it could be a period of deflation that lasts months (and even reverses) for a short time (something that happened, as evidenced by the Manheim and Michigan reports end of the week), although the substantial shift in yields and Fed assumptions somewhat mitigates this risk (at this point, the market should be able to cope with Tuesday’s CPI was slightly higher than expected, but there will certainly be a massive overshoot causing selling),’ Vital Knowledge analysts wrote to clients in a note.

Morgan Stanley analysts warn that there is a “growing risk” that the January CPI report could exceed the allowed level.

“Can the release of hotter-than-expected CPI this week bring these markets back in line? Possibly so, although we acknowledge growing expectations of a consensus outcome,” they said.

The market now forecasts that overall inflation will fall below 4% by year-end and near 2.5% by 2024.

“Our view is that core inflation will head towards 3.0% this year, which may not happen in a lower straight line and it may not,” said Edward Jones analysts. constantly surprise the downtrend”.

Earning season continues

Earnings season continues with 69% of S&P 500 companies reporting actual results on Friday. 69% of S&P 500 reported a positive EPS surprise while 63% beat revenue, according to FactSet.

For the fourth quarter, the S&P 500’s aggregate earnings decline was -4.9%. This will be the first annual earnings drop since Q3 2020, when earnings fell 5.7%.

In terms of guidance, FactSet data shows that 58 S&P 500 companies have issued negative EPS guidance for the quarter.

Key earnings reports to watch this week include Coca-Cola (NYSE:), Biogen (NASDAQ:), Cisco Systems (NASDAQ:), Roku (NASDAQ:), DoorDash (NYSE:) and Deere (NYSE:).

What do analysts say about the stock?

Goldman Sachs: “The market continues to weigh the strong January jobs report against signs that deflation is underway. The labor market recovery coupled with signs of improvement in business surveys have led our economists to cut down on the subjective probability that the US economy will enter a recession in the next 12 months from 35% down to 25%. Similarly, the improvement in macro data led us to raise our 3-month S&P 500 target to 4000 (from 3600) last week.”

JPMorgan: “We believe the stock rally started last October and we expect to be driven by bond yields/CPI peaking, China reopening and European gas prices declining, it is difficult to get fundamental confirmation for the next period higher as the year progresses. After positioning for recovery, in our opinion, Q1 is likely to mark the high point of the market. With this in mind, we think one should use ytd returns to trim equity allocations and reduce portfolio betas, taking advantage of the very weak Defensive performance since the summer of 2015. last.”

Morgan Stanley: “Price action does not reflect deteriorating fundamentals or the fact that the Fed is bullish during an earnings downturn — drivers that will ultimately determine bear market lows by the end of this spring… With the stock market showing some real signs of exhaustion last week, we think the risk reward is as poor as at any time in this bear market.”

Key Knowledge: “SPX remains in ‘do nothing’ territory (index becomes more attractive below 4050).”

BTIG: “Going into this year, we think one of the key themes will be the market’s shift from inflation and the Fed to a weakening economy. At this point, that view seems premature with yields trying to break out, commodities likely to recover and equities falling deeper. We still expect the flip to happen before this cycle ends, but it could now be half of the ’23 story. This shows that value is likely to outperform growth, and after an 8% drop, the V/G ratio now appears fairly timely.”

Citi: “We maintain our view that earnings resilience will be the subject of the current regime change. However, a less negative earnings picture also implies fewer acquisition opportunities. A higher Fed regime for longer will limit valuation upside from here, thus keeping the S&P 500 in a trading range.”

Canaccord Genuity: “The stock market is showing signs of slowing down, in line with the new medium-term (1-2 months) correction that is forming. A mid-term correction is likely to drop to December lows across most North American stock indexes. We view this drop as an opportunity to increase our exposure as equities markets have recorded a multi-week close above their 40-week moving average, which clearly shows a 4-week cycle. The new year (cyclical bull market) is happening.”

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