All Roads Lead To Recession

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Samantha Subin and Hakyung Kim of CNBC report stocks end Friday’s session little changed, Dow snaps 4-week win streak:

The Dow Jones Industrial Average ended little changed Friday and finished lower for the week as investors evaluated the latest earnings results and concerns of disappointing profits.

The 30-stock index added 22.34 points, or 0.07%, to end at 33,808.96, while the S&P 500 eked out a 0.09% gain to settle at 4,133.52. The Nasdaq Composite rose 0.11% to close at 12,072.46.

All major indices finished the week in the red, with the Dow falling 0.23% to snap a four-week win streak. The tech-heavy Nasdaq saw the biggest decline, falling 0.42%, while the S&P slipped 0.1%.

“There’s the continued push-pull of the fact that the economy has been a lot more resilient than many people expected and corporate earnings have held up pretty well, all things considered,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Even so, he noted that the Federal Reserve has raised rates substantially over the last year. Zaccarelli said that even if the central bank hikes as anticipated in May, it will likely hold rates at a higher level than the market expects.

“You can kind of see the the bull and bear case really right there in a nutshell as far as resilient economy with stronger-than-expected corporate earnings versus a very hot, very restrictive monetary policy coming from the Fed,” he said.

Earnings season continued Friday, with results from Procter & Gamble. The consumer products company gained 3.5% after beating expectations and lifting it sales forecast. As of Friday morning, 76% of S&P 500 companies reporting earnings so far have beaten analyst EPS estimates, according to FactSet.

Elsewhere, materials stocks were the worst performers, with Freeport-McMoRan falling 4.1% after posting a year-over-year decline in its quarterly results. Albemarle tumbled 10% as Chile said it would nationalize its lithium industry.

While companies broadly beat expectations this week, overall profit reports failed to boost stocks, with some investors fearing an earnings drop looms with a likely recession ahead.

“So far, earnings season is off to an uneventful start, with many companies meeting already reduced earnings expectations and that helps to explain the lack of movement in the major stock indices over the past few days,” said Carol Schleif, chief investment officer at BMO Family Office. She added that she expects stocks to trade in a tight range for some time.

Earnings continue next week with results on deck from Big Tech companies Amazon, Alphabet, Meta Platforms and Microsoft.

Lewis Krauskopf, Sruthi Shankar and Ankika Biswas of Reuters also report that Wall St posts slim gain ahead of big earnings week:

Major U.S. stock indexes ended with fractional gains on Friday following mixed earnings results as investors assessed how conflicting economic data might influence interest rates and looked ahead to a massive week of corporate reports.

A survey showed U.S. business activity accelerated to an 11-month high in April, further clouding the outlook for the Federal Reserve's monetary policy after data earlier in the week indicated a weakening economy.

Procter & Gamble Co's (PG) shares rose 3.5% as customers kept buying despite repeated price hikes, helping the maker of products raging from Tide detergent and Gillette razors to Head & Shoulders shampoo and Crest toothpaste boost its sales forecast and third-quarter margins.

The benchmark S&P 500 has been generally stable over early stages of a first-quarter earnings season that investors expect to show tepid results. Next week will see a flood of reports, including from megacap tech and growth companies whose shares have helped the S&P 500 rally to start the year.

“The market has been basically in a bit of a holding pattern ahead of big tech earnings next week,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. "There is a tug of war between good and bad economic data, good and bad earnings data.”

The Dow Jones Industrial Average rose 22.34 points, or 0.07%, to 33,808.96, the S&P 500 gained 3.73 points, or 0.09%, to 4,133.52 and the Nasdaq Composite added 12.90 points, or 0.11%, to 12,072.46.

For the week, the S&P 500 slipped 0.1%, the Dow dipped 0.2% and the Nasdaq lost 0.4%.

Results next week are due from some of the highest-valued U.S. companies including Microsoft (MSFT), Google parent Alphabet (GOOGL) and Amazon (AMZN). Amazon shares rose 3% on Friday after a research firm predicted the online retailer's business in North America would beat Wall Street's estimates.

The materials group (XME) fell 0.9%, most among S&P 500 sectors, weighed down by declines in Freeport-McMoRan Inc (FCX) and Albemarle Corp (ALB). Albemarle slumped 10% after Chile unveiled plans to nationalize the lithium industry. Shares of Freeport dropped 4.1% after the copper miner's first-quarter profit more than halved.

In other earnings news, HCA Healthcare Inc (HCA) shares jumped about 4% after the hospital operator lifted forecasts for 2023. Its report boosted shares of other hospital operators.

So far, analysts have largely retained last week's expectations of a near-5% year-on-year fall in quarterly profits at S&P 500 companies, according to Refinitiv data.

"The unpredictability of earnings and revenue and guidance going forward has increased a lot," said Peter Tuz, president of Chase Investment Counsel. "You have signs that the economy is softening all over the place."

Declining issues outnumbered advancing ones on the NYSE by a 1.24-to-1 ratio; on Nasdaq, a 1.10-to-1 ratio favored decliners.

The S&P 500 posted 20 new 52-week highs and 4 new lows; the Nasdaq Composite recorded 53 new highs and 186 new lows.

About 9.9 billion shares changed hands in U.S. exchanges, compared with the 10.4 billion daily average over the last 20 sessions.

While stocks are on track to finish the week close to where they started, Goldman Sachs’ Chris Hussey is taking away some positives from the market action, and latest earnings releases.

“One of the stories that we are pulling out of this week is the push-and-pull between how corporate executives and investors seem to be thinking about the economy and how the economy (and corporate earnings) are actually performing,” he wrote Friday in a note to clients.

And, while some “signs of cracks” have emerged, earnings season has so far conveyed a “fairly constructive picture, he added.

This week, United Airlines and Alaska Air were among the best performers post-earnings, signaling to the investing community that travel still remains top of mind, Hussey wrote.

At the same time, the housing market looks to be faring better than expected, with homebuilder DR Horton among the week’s best performers.

“Management noted a stabilization in operating conditions during the quarter—including incentives, labor, and costs—allowing for greater consistency in results as DHI appears to be navigating a decelerating inflation environment quite well,” he said.

Elsewhere, people appear to be returning to the hospital in a post-pandemic world, with companies like HCA reporting patient levels above 2019 in most categories.

These pockets of strength all come as inflation shows signs of deceleration, Hussey added.

Apart from Tesla's earnings disaster, the kickoff of earnings season has been uneventful.

Next week promises to be a much busier with mega cap tech names on deck to report earnings.

But the real  story remains the deteriorating economy.

Adam Clark of Barron's reports that jobs, banks, earnings all point to recession and markets are preparing for another Fed rate hike:

More red lights are flashing across the U.S. economy. If recession fears were beaten back for a time earlier this year, this week they came front and center.

The Conference Board’s Leading Economic Index—which measures U.S. business cycles—dropped unexpectedly sharply to its lowest level since November 2020. It was its 12th consecutive monthly decline, the longest such run since the period from 2007-2009—not the most positive precedent.

For those who prefer more concrete measures look at the labor market, where the latest data show initial jobless claims rising again. It wasn’t a big increase but it’s a sign of what is likely to come. Meta CEO Mark Zuckerberg now says the social media company intends to scale back employee growth to just 1% to 2% a year. If tech’s most prolific hirer is signaling new applicants are less welcome, that’s a poor sign for future job seekers.

Earnings season isn’t exactly lifting the mood. Regional lenders’ results were mixed and bank borrowing from the Federal Reserve increased for the first time in five weeks. Even Elon Musk’s Tesla earnings call had a gloomy tone—and that was before his rocket blew up. 

Traders have all but given up hope the Federal Reserve will ride to the rescue by pausing its rate-hiking cycle. In the last comments before their blackout period, Fed speakers this week only doubled down on the prospects for another increase—and the CME FedWatch Tool now shows a nearly 85% chance of a 25 basis-points hike at the May meeting.

Markets have been operating under the shadow of a recession for a long time and still managed to rise. But markets had also expected the Fed to start cutting this year. Now, knowing that the central bank is still working against them as the economy cools, sentiment could sour quickly.

Sam Meredith of CNBC also reports a recession is coming — and stock markets won’t come through it unscathed, strategist says:

The latest U.S. economic data suggests a recession is coming, according to the chief executive of financial advisory firm Longview Economics, and investors may need to prepare for some pain in the stock market.

Speaking to CNBC’s “Squawk Box Europe” on Friday, Chris Watling said he believed a recession was on its way, citing what he described as “pretty compelling” and “brutally bad” leading economic indicators.

The Conference Board on Thursday said its Leading Economic Index for the U.S. fell by 1.2% in March, slipping to its lowest level since November 2020. The data appeared to indicate that economic weakness could soon intensify and spread throughout the U.S. economy.

Alongside this warning signal, Watling said the typical timeline for a recession after the inversion of the Treasury yield curve, which first inverted in March 2022, then again in the following months, was roughly one year or so.

“Every time you’ve had that in the U.S., you’ve had a recession. So, I think it’s coming, it’s on its way. It’s just a timing issue,” Watling said.

While many economists have warned of a looming recession, the International Monetary Fund suggested only last week that it had been surprised by the recent strength of the U.S. labor market and consumer spending.

The IMF on April 11 released its latest World Economic Outlook report, in which it said it sees the world’s largest economy expanding by 1.6% this year, up from the 1% forecast in 2022.

Gita Gopinath, the IMF’s first deputy managing director, told CNBC’s Joumanna Bercetche last week that signs of cooling inflation data had given the fund reason to believe the U.S. economy could avoid a recession. However, a so-called hard landing was still “within the realm of possibilities,” she added.

Earnings expectations ‘way too optimistic’

Asked on Friday whether equity markets could come through an expected economic downturn relatively unscathed, Watling replied: “I mean they won’t come through it unscathed in our opinion. I’m not even sure about relatively.”

“The reality is if you look at profit margins, they went to record highs in 2021 and a bit of 2022, and of course when you have a lot of inflation around, you can get very good operating leverage so you can get record high profit margins,” Watling said.

“When you get into recession, we’ve got to do a double hit on profit margins. You’ve got to normalize them back to normal levels and then you’ve got to price in a recession. So, I think the expectations for earnings are way too optimistic and therefore the stock market will have to contend with that at some point.

The stock market is running on algos these days, there is no real conviction although most professional fund managers are bearish.

And with good reason, a recession is probably already upon us:

As far as stocks, they're surviving for now but big trouble lies ahead:

Lastly, take the time to read this interview with Claudia Sahm:

My big fear remains that the Fed hikes once more in May, then pauses for a long time and wage inflation pressures start picking up, forcing the Fed to start hiking even more in the second half of the year.

Below, Gunjan Banerji, markets reporter at The Wall Street Journal, joins 'Squawk Box' to discuss next week's Big Tech earnings results, the market, and more.

Also, CNBC's Kate Rogers joins 'The Exchange' to discuss increased difficulty for small businesses to receive loans, and the recent bank failures contributing to the loan tightening.

Lastly, Jason Snipe, Jenny Harrington, Steve Weiss join 'Halftime Report' to discuss big cap tech earnings, a downward market bias, and Lyft's job cut plans.

I agree with Weiss, we're in a bear market and it's going to go lower.

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