Use Q1 rally to cut stocks exposure By

© Reuters. Dow Jones, Nasdaq, S&P 500 weekly preview: Use Q1 rally to cut stocks exposure

By Senad Karaahmetovic

The U.S. equities moved lower last week as investors await tomorrow’s CPI release and continue to digest remarks from Federal Reserve policymakers. The (SPX) closed 1.1% lower, Index (IXIC) fell 2.4%, while (DJI) had another uneventful week (-0.17%).

The S&P 500 recorded the worst week of the year as some uncertainty and volatility returned to markets. With all eyes on this week’s CPI, the market seems at a crossroads: Continue rallying or correct lower?

Focus on CPI

The New York consumer expectations survey is due today before the U.S. Bureau of Labor Statistics (BLS) releases inflation data for January. The headline inflation is expected to drop to 6.2% (YoY) from 6.5% reported for December. On a (MoM) basis, CPI is expected to increase by 0.5%.

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

“We’re still worried about inflation (in the near-term) – it’s likely the months-long phase of disinflation stalls (and even reverses) for a brief period (something that’s already happening, as evidenced by the Manheim and Michigan reports last week), although the dramatic move in yields and Fed assumptions de-risks this somewhat (at this point, the market should be able to cope w/a CPI on Tues that prints a little bit higher than expected, but a big overshoot would certainly cause selling),” Vital Knowledge analysts wrote to clients in a note.

There is a “growing” risk that the January CPI report could overshoot, warned Morgan Stanley analysts.

“Could a hotter than expected CPI release this week be what brings these markets back in-line with one another? It could be, though we acknowledge the growing expectation for an above consensus result,” they said.

The market now projects that the headline inflation will drop below 4% by year-end and closer to 2.5% by 2024.

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

Earnings season continues

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

For the fourth quarter, the blended earnings decline for the S&P 500 is -4.9%. This would mark the first YoY decline in earnings since Q3 2020, when earnings fell by 5.7%.

On the guidance front, FactSet’s data shows that 58 S&P 500 companies have issued negative EPS guidance for this 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 are analysts saying about stocks?

Goldman Sachs: “Markets continued to weigh a strong January jobs report against signs that disinflation is well under way. The resilient labor market coupled with signs of improvement in business surveys led our economists to cut their subjective probability that the US economy will enter a recession in the next 12 months to 25% from 35%. Similarly, the improvement in macro data led us to lift our 3-month S&P 500 target to 4000 (from 3600) last week.”

JPMorgan: “We believe that the equity rally that started last October, and that we hoped would be driven by peaking bond yields/CPI, China reopening, and the fall in European gas prices, is unlikely to get the fundamental confirmation for the next leg higher as the year progresses. Once the positioning recovers, Q1 is in our view likely to mark the high point of the market. With this in mind, we think that one should be using the ytd gains in order to cut equity allocation, and to reduce the beta of a portfolio, taking advantage of the very weak Defensives performance since last summer.”

Morgan Stanley: “Price action is not reflective of the deteriorating fundamentals or the fact that the Fed is hiking during an earnings recession —drivers that should ultimately determine the lows for this bear market later this spring… With equity markets showing some real signs of exhaustion last week, we think the risk-reward is as poor as it’s been at any time during this bear market.”

Vital Knowledge: “The SPX is still in ‘do nothing’ territory (the index becomes more appealing below 4050).”

BTIG: “Coming into this year we thought one of the key themes would be market’s focus shifting from inflation and the Fed to a weakening economy. At this point that view looks to be premature with yields attempting to breakout, commodities resilient, and stocks breaking lower. We still expect the flip to occur before this cycle is done, but it might now be a back-half of ’23 story. This suggests that value likely outperforms growth, and after an 8% pullback the V/G ratio now appears quite timely.”

Citi: “We maintain our view that earnings resilience will be a theme of the current regime shift. However, a less negative earnings picture also implies less snap-back opportunity. A higher-for-longer Fed regime should limit valuation upside from here, thus keeping the S&P 500 in a trading range.”

Canaccord Genuity: “Equity markets are showing signs of stalling, consistent with a new intermediate-term (1-2 month) corrective phase taking hold. An intermediate-term corrective phase has downside potential to the December lows on most North American equity indices. We view this pullback is an opportunity to add exposure as equity markets have registered multi-week closes above their 40-week moving averages, which strongly suggests a new 4-Year cycle (cyclical bull market) is underway.”

#rally #cut #stocks #exposure

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