The S&P 500 just closed its first losing quarter since the first quarter of 2020 at the start of the Covid-19 pandemic. Before January 2022, there were nearly two years of an unbroken bull market, which is a good record, but investors should be cautious about expecting a similar run in 2022.
At the beginning of each quarter, most public companies report their profits for the previous quarter and the outlook for the next quarter to their shareholders. This quarterly cycle, also called “earnings season,” starts at the end of next week when the big banks start reporting.
These reports are more valuable than the economic data released by the government because they lag less and, in the aggregate, are more detailed. Some companies, including Nike (NYSE:NKE), Adobe Systems (NASDAQ:ADBE), General Mills (NYSE:GIS) and Paychex (NASDAQ:PAYX), have already reported over the last two weeks, and the results were very good.
This week, Constellation Brands (NYSE:STZ) will report on Thursday morning. Besides being one of the few early reports this month, the STZ profit announcement is important because it will give us another view into whether consumers are still spending. We are optimistic about the data, but we need to closely watch each of these early reports.
Economic Data is Trending Down
Over the past couple of months, what has been perplexing has been the divergence between earnings or profit data (which has been good) and economic data. There aren’t any economic reports pointing to a recession yet or anything, but the trend has been negative.
For example, on Tuesday, April 5, the Institute for Supply Management (ISM) will report their services Purchasing Managers Index (PMI), which has been trending down since December. That was a lot of acronyms to dump on you all at once, but the ISM’s PMI report is one of the best and most overlooked indicators we get each month.
The PMI is a sentiment survey, so along with gathering data from businesses about their current performance, it also asks about how they feel about the future. Because stock prices are a function of future estimates, this report is one of the leading indicators for where sentiment is trending and what to expect in the near future.
The PMI report isn’t the only economic report that is still positive but trending down over the past few months. We can’t reconcile this decay with the earnings data we have yet, but a divergence like this is something for us to watch closely. A similar divergence appeared in late 2019, and profits, and stock prices started to struggle even before the COVID-19 pandemic/lockdowns took off in January 2020.
Focus on Large-Cap Growth and Value
For now, we still recommend a focus on large-cap growth and value in the tech and retail sectors. These groups got off to a slow start last week but are leading the market today, which we expect to continue as earnings season gets underway.
We’ll delve more into inflation’s effects on stock profits for the month, plus cover the potential for volatility as companies report issues with rising wages, difficulty hiring, and spiking materials and energy costs. Don’t miss your chance to ask questions about individual stocks and general trends at 7:00 ET tonight.