Capital markets perspective: Where do we go from here?

Capital markets perspective: Where do we go from here?


I’ve always found it weird that we tend to celebrate birthdays in decades. Sure, there are important celebrations along the way, but beyond a certain age, it’s the decennials (30, 40, 50, 60) that grab our attention.

Markets are sort of the same: On Friday, the S&P 500 Index® closed above the 5,000 mark for the first time ever. That grabbed a strikingly large number of headlines, especially given that it means absolutely nothing from a fundamental perspective: Prospects were pretty much the same for the S&P 500 two weeks ago when the index was hovering around 4,900 as they are today as it floats just above 5,000. But “S&P 5K” still seems to have captured everyone’s imagination.

I suppose the behaviorists out there would chalk it up to “anchoring bias,” a phenomenon that has been studied enough to earn itself a name and a legitimate place in investment theory. This suggests that there is at least something worth paying attention to when broad market indices like the S&P 500 reach big, round milestones.  

With that in mind, I crunched a few numbers and tried to answer the question of whether S&P 5K really matters after all. The results? Underwhelming. For example, it’s hard to find any statistical anomalies in price return data during the 1-week, 1-month and 1-year periods after the S&P 500 hit the 1K, 2K, 3K and 4K milestones. (The one exception was the one-month period between July and August of 2019 following the 3,000 milestone, when the index dropped 4.3%, slightly more than it “should” have.)

This is hardly a scientific study, and I suspect that others with bigger brains and more computing power could probably find evidence to the contrary, but this quick back-of-the-envelope exercise was enough to convince me that the “S&P 5K” has not changed my outlook on where markets might go from here.   

From a macroeconomic perspective last week, there was very little happening. Thursday’s weekly unemployment claims data1 once again failed to provide much evidence that the rising tide of headline-grabbing layoff announcements has begun to impact high-frequency data in a way that would suggest recession, and Monday’s ISM/PMI readings re-confirmed that the services sector is holding in just fine – at least for now.2,3

There were a few details in the PMI reports worth calling out, most notably several uncomfortable anecdotes suggesting that cost burdens are again rising quickly, which in turn hints at the idea that the easiest progress on inflation has already been made. That jibes with last week’s commentary from various Federal Reserve officials, who chose to reiterate rather than refute Chairman Jerome Powell’s message that the Fed isn’t in any big hurry to begin cutting rates until they’re more fully convinced that inflation has really been beaten for good. Investors are slowly getting that message and adjusting their rate expectations accordingly, which probably helps explain why Treasury yields rose significantly last week. 

But also tucked inside those same PMI reports was evidence that output prices – the prices those very same survey respondents are in turn charging their customers – aren’t keeping up with higher costs on the expense side of the income statement. That raises the possibility that profit margins are being squeezed in a way that will eventually show up in things like hiring plans and reported earnings – something for which the market in general seems somewhat ill-prepared.

For now, though, there were few signs that corporate earnings are particularly stressed. Trends so far this season remain sloppy, at least to my eyes, but companies have been able to beat street expectations in roughly the same proportion as they did throughout 2023 (and are generally faring far better than fiscal 2022, when earnings disappointments peaked above 25%).

Moreover, those disappointments that have popped up seem more related to softening demand than to a collapse in earnings and profit margins. There were multiple examples last week, including revenue disappointments in ag/industrial equipment, tech/social media and traditional media and elsewhere. One worth highlighting came from iconic motorcycle maker Harley-Davidson, which reported disappointing topline and unit sales, at least partly because high financing rates have deterred would-be buyers. It’s easy to imagine that this kind of feedback loop – higher rates resulting in lower unit demand and therefore weaker inflation – is exactly what the Fed had in mind when it began raising rates nearly two years ago. But if that becomes more common as earnings season rolls on, and if it’s eventually joined by thinner margins, earnings trends will undoubtedly fall under pressure across a broader range of firms.

Finally, last week’s light economic calendar also allows us to focus on two quarterly reports from the Fed. The first, the New York Fed’s household credit report, simply confirmed what many readers had probably already suspected: The combination of high interest rates, coupled with rising consumer credit balances, is causing delinquency rates to rise for many types of consumer loans.4 While delinquencies are still well below levels reached during 2008-2009, 30-day delinquency rates, particularly among auto and credit card borrowers, have risen steadily since early- to mid-2022 when the Fed began raising rates.

Potentially more impactful, the Senior Loan Officer’s Opinion Survey, or “SLOOS,” continues to point toward slower economic growth as well.5 This survey is designed to test whether bank managers are tightening or loosening credit – something that can have an enormous impact on economic growth: When banks are more willing to lend, growth accelerates because businesses have more capital to expand. But when they’re less willing to lend, the whole thing runs in reverse and economic growth should contract. For several quarters running, the SLOOS has shown a decline in demand for nearly all types of loans, as well as a drop in banks’ willingness to extend those loans. While the pace of that contraction has slowed, you can keep last week’s SLOOS at the top of the list of concerns suggesting slower economic growth ahead.

What to watch this week

For the first time in several weeks, economic data will replace earnings on the list of important things to watch. That’s because inflation data, after spending several months on much-needed hiatus, re-entered the conversation due to the Fed’s reluctance to cutting rates, as well as anecdotes in survey-based data like the above-mentioned PMI reports, where rising fuel and wages are making it impossible to rule out a restart. Tuesday’s consumer price index (CPI) and Friday’s producer price index (PPI) will be the key releases to watch. While I wouldn’t expect either reading to come in hot enough to roil markets just yet, it's safe to say that investors are once again paying closer attention to CPI and PPI than they have in the recent past.

We’ll also get two reads on the health of the consumer that are worth a closer look: Retail sales on Thursday and the University of Michigan’s mid-month release of its consumer sentiment index on Friday. The U.S. consumer has remained resilient in the face of multiple headwinds, and at some point that will probably have to change. For now, though, sentiment will probably remain strong, even if nominal sales retrace some of their recent strength as last week’s rash of corporate earnings seemed to suggest they might.  

On the production side of the economy, we’ll get our first two regional Fed manufacturing reports in the form of Empire State Manufacturing and the Philly Fed, both due out Thursday. These surveys have been exceptionally weak in recent months and a continued trend would probably signal a re-weakening of the manufacturing PMIs that economists often look toward for clues regarding the direction of the economy at large.

Meanwhile, the National Federation of Independent Business’ small business sentiment survey is due out Tuesday. Small businesses have been dejected since at least early 2022, but like consumer sentiment, confidence among small business owners has become incrementally more upbeat since the middle of last year. Because small- and mid-sized businesses represent a significant portion (if not an outright majority) of both economic activity and aggregate U.S. payroll employment, how they’re feeling about the economy can provide a very important signal of what lies ahead.

On the earnings front, the number of marquee names scheduled to release results has begun to decline. That makes it a “numbers game,” where broad trends are more likely to emerge, but context and nuance sometimes get lost in the noise. But it’s always worth remembering that any individual company can provide profound insight into the macro environment when its executive team is handed a microphone. Earnings-related commentary from several travel-related firms (Marriott, TripAdvisor and Airbnb) will give us an opportunity to view leisure and business-travel trends as a cross-check on consumer health, while several additional tech- and semiconductor-related companies will have the opportunity to weigh in on the hype or substance of AI when they release results this week.

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Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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