Dow Jones, Nasdaq, S&P 500 weekly preview: The sentiment change

By Senad Karaahmetovic

U.S. futures trade mixed in premarket Monday after equities secured a strong weekly close on Friday. The S&P 500 futures are down about 0.2% while Dow Jones futures are trading almost 0.4% higher.

Last week, the S&P 500 added 3.5% - its biggest weekly gain since November. The index is now approaching the 100 weekly moving average at 4205. On the valuation front, the forward 12-month P/E ratio for the S&P 500 is 17.8, which is below the 5-year average (18.5%), but above the 10-year average (17.3).

Stocks were boosted by fading concerns around the health of the banking sector, while the core PCE index - the Fed’s preferred inflation measure - came in below expectations on Friday, further fueling a rally in equities.

Nasdaq Composite Index (IXIC) gained 3.4% as it approaches 2023 highs. Dow Jones (DJI) closed the week 3.2% higher with the key near-term resistance located around 2% higher from current levels.

The key data for this week is Friday’s jobs report and it comes on the day when the market is closed (Good Friday). Moreover, the ISM Manufacturing PMI is out later today while the ISM Services PMI is out on Wednesday.

Q1 earnings season to start soon

The 1Q23 earnings season is expected to start later this month when big banks come out with their quarterly results. Banks’ earnings will be especially scrutinized following last month’s development and the historic collapse of Silicon Valley Bank.

According to Barclays’ data, U.S. deposits fell by $133 billion in the week ended March 22 after dropping $129B in the week ended March 15.

Several companies have already reported on their Q1 performance with FactSet noting that 16 out of 17 S&P 500 companies reported an EPS beat for Q1. Vital Knowledge analysts expect the Q1 earnings season to be “full of volatility.”

Analysts expect earnings to decline 6.6%, which would mark the largest earnings decline reported by the S&P 500 since Q2 2020 (-31.8%). As far as the guidance is concerned, as many as 79 S&P 500 companies have issued negative EPS guidance.

According to FactSet, analysts lowered their EPS estimates more than normal in the first quarter.

“The decline in the bottom-up EPS estimate recorded during the first quarter was larger than the 5-year average, the 10-year average, the 15-year average, and the 20-year average."

Still, the forward 12-month P/E ratio for the S&P 500 has increased since December as the soaring index valuation has managed to offset lowered EPS estimates for 2023.

What analysts are saying about stocks

Oppenheimer: “The S&P 500 is stabilizing from its 2022 downtrend, and we think is more likely to break higher because market leadership since Q4’22 has been stronger than a bear market rally. The market can be irrational, especially over short-term periods, but we’d argue economic signals can mislead investors more than market signals.”

Wells Fargo: “Continue to reduce cyclicality and risk with the SPX above 4100. Maintain our 4200 year-end price target. Observing a growing number of risks in 2H23: debt ceiling, tighter financial conditions, CRE and a possible resumption of student loan payments.”

JPMorgan: “Our view [is] that stocks are set to weaken for the remainder of the year. We were bullish equities in Q4, and we expected positive trading to spill over into Q1, but we believe one should be UW stocks from here.”

Morgan Stanley: “We think investors should continue to position portfolios more defensively and focus on companies that exhibit high operational efficiency and high quality of earnings (high cash flow relative to reported earnings and stable accruals). We see little evidence that a new bull market has begun and believe the bear still has unfinished business.”

Goldman Sachs: “While history suggests upside risk to our forecast for a flat S&P 500, we believe valuations and earnings each face specific headwinds that will prevent near-term returns from being as strong as usual.”

Vital Knowledge: “Data should be a tailwind for stocks as disinflation resumes and the jobs market cools – this is likely going to be the catalyst that gets the SPX to ~4200-4300 by the end of April).”

Sevens Report: “The bank crisis has overshadowed the economic and inflation data for most of March, but that should change this week as the key economic reports for March are released. For stocks to hold these recent gains, we need to see 1) Hints of disinflation restarting and 2) A stable economy (and no signs of stagflation).”