Stocks rise on better than expected earnings, strong jobs report

To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude. – John Templeton

For the second consecutive week, the S&P 500 Index and the Dow Jones Industrial Average posted modest gains while the Nasdaq Composite Index rose nearly 2.5% as investors bought beaten down technology stocks. Investors were glad to put the month of January behind them as the S&P 500 fell 5% during the month, its biggest January decline since 2009, and the Nasdaq dropped 9%. Unfortunately, the month of February has traditionally been a weak month for stocks, second only to September in terms of performance. Fourth quarter earnings were the primary focus last week and so far in this earnings season the news has been good with nearly 80% of companies beating analysts’ estimates. However, the amount that companies are exceeding those earnings expectations is the smallest since the first quarter of 2020. The highlight last week was the release of earnings reports from several of the biggest technology companies in the U.S., namely Alphabet (Google), Amazon and Meta Platforms (Facebook). Alphabet easily beat revenue and earnings forecasts as revenue grew 32% and the company announced a 20 for 1 stock split. Amazon also reported stronger than expected revenue and earnings and the stock jumped 15% on the news. But it was the hugely disappointing profit report from Meta Platforms on Thursday that caused the Nasdaq to tumble nearly 4% as the company’s poor results and unfavorable outlook shook investor confidence in the technology sector. An unexpectedly strong January employment report on Friday brought some relief to an oversold market as the number of new jobs rose 467,000, well above estimates of 150,000. Although the unemployment rate edged higher to 4.0% from 3.9%, both November and December job numbers were revised higher by a whopping 709,000 jobs. Wages for the month also surged and have risen 5.7% for the year, raising speculation that the Federal Reserve could raise the federal funds interest rate by 50 basis points (a basis point is one hundredth of one percent) when it meets in March. Despite the spread of the Omicron variant, the strong employment report was enough to cause the yield on the 10-year Treasury to rise to 1.92% as investors feared that the Fed may become more aggressive in fighting high inflation.

Last Week

Other jobs-related data last week was mixed as weekly jobless claims were slightly less than expected while ADP reported that private payrolls actually fell by 301,000 in January, compared to forecasts of an increase in jobs of about 200,000. Both the ISM manufacturing and services sector indices in January fell slightly from their readings in December but were still comfortably above the 50 threshold that indicates expansion. U.S. oil prices topped $90 per barrel for the first time since 2014, adding to concerns about inflation.

The European Central Bank (ECB) kept interest rates unchanged at negative 0.5% despite record increases in inflation due to higher energy prices and supply-side constraints and not excessive demand.

For the week, the Dow Jones Industrial Average rose 1.1% to close at 35,089 while the S&P 500 Index gained 1.6% to close at 4,500. The Nasdaq Composite Index jumped 2.4% to close at 14,098.

This Week

The consumer price index (CPI) for January is expected to jump over 7% year-over-year while the core CPI that excludes food and energy prices is expected to rise nearly 6%, the highest inflation readings in 40 years. The preliminary University of Michigan consumer sentiment index for February is forecast to be about the same as in January, which was the lowest for the survey since November 2011.

The most prominent companies that are scheduled to report quarterly earnings this week are Walt Disney, Sysco, Coca Cola, PepsiCo, Kellogg, Phillip Morris International, Tyson Foods, Yum Brands, Amgen, Pfizer, CVS Health, Zimmer Biomet Holdings, Simon Property Group, BP, Duke Energy, Dominion Energy, DuPont, Honda Motor, Toyota Motor and CME Group.

Portfolio Strategy

In addition to another busy week for fourth quarter corporate earnings reports, investors will be focused this week on the consumer price index (CPI) in January. This piece of inflation data will take on added importance after the much stronger than expected January jobs report that showed more than three times the number of jobs created than forecast. Even more remarkable was the huge revisions in the number of jobs created in the prior two months and the bigger than expected increase in wages. After ADP reported an actual decline in jobs in January, the government employment data was both unexpected and shocking as many economists were predicting that the surge in the Omicron variant would create job losses. The reaction in the bond market was swift as the yield on the 2-year Treasury rose to 1.32% while the 10-year Treasury yield increased to 1.92%, a difference of only 60 basis points. Most economists expect GDP growth to slow this year, which explains the flattening of the yield curve, but the 10-year Treasury yield is dangerously close to the 2% level, which could be problematic for stocks. With the next Federal Reserve meeting scheduled for March 15^th, the presumption is that the Fed will raise rates by a quarter percentage point, although the strong jobs report increased speculation that a 50 basis point increase is not out of the question. For this reason, the CPI report this week will be watched closely as inflation has been running hotter than at any time since 1982. A higher than expected number could make the Fed more hawkish just like its counterparts in the United Kingdom and Europe, who have also made comments about their high inflation. But the prevailing view is that although inflation is running higher than previously thought, it will likely peak soon and begin to come down as the year progresses, both here and abroad.