Market news today - climbing the wall of worry

WE’RE a third of the way through 2023 and, so far, it’s so good for the stock market. The S&P 500 is up more than 9% year to date. Beneath the surface, however, it’s a more nuanced picture.

Narrow leadership

Market gains in the first four months of the year are a relief after last year’s correction. But there’s more to this rally than meets the eye. For one thing, we’re still locked in a sideways channel as we have been for nearly a year now. Investors can’t decide whether last October was the start of a new bull market or just the end of 2022’s retreat.

Secondly, there’s no breadth to this recovery. It’s all been about the return to favour of a handful of giant tech stocks, some of which delivered better than expected earnings last week. They are big and important companies but they still only account for about a fifth of the value of the S&P 500. They’ve delivered around three quarters of the market’s gains year to date, though, so they are clearly punching well above their weight.

And what that means, almost by definition, is that the rest of the market is not really going anywhere. The Russell 2000 index of smaller US companies is flat year to date, and while here in the UK the FTSE 100 is up in the first four months, last year’s outperformance has petered out. The microcaps index in the US (the bottom half of the Russell index) is actually down year to date by around 5%.

All eyes on interest rates

It’s hardly surprising that investors remain nervous. Despite all the talk of a peak in the monetary policy cycle, rates are still on the up. This week we hear from both the Fed and the ECB. Next week it is the Bank of England’s turn. In all three cases, we should expect another hike. And only with the Fed can we really have much conviction that this is it as far as further hikes are concerned.

It makes sense for the Fed to pause here. After 5 percentage points of rate rises in around a year, it is reasonable to assume that quite some damage has been done to the economy. Rate rises are designed to slow growth and history suggests that central banks usually overdo it in their eagerness to get on top of inflation.

Earnings season in full flood

Where all this comes together, as far as investors are concerned, is in company earnings. And we are right in the thick of the first quarter earnings season now. So far, results look promising. With around half of the US announcements now made, something like 80% have beaten expectations, and by a decent margin too.

We are still forecasting a mild earnings contraction for the year as a whole. If that is what we get, then investors are right to be looking through the dip to better times in 2024. Six months on, it looks like the October low may be it for this cycle, but it feels too early to be cheering the start of a new bull market.

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