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EARNINGS HOPE (1358 EDT/1758 GMT)
Investors have been hoping that quarterly earnings will help the stock market which has been battered by the prospect of tighter financial conditions, according to Jack Ablin, chief investment officer at Cresset Capital Management in Chicago.
While first-quarter results so far overall are beating expectations, "companies are having a harder time maintaining their target profit margin," he wrote in a note this week. "Earnings growth has been in steady decline since its peak in Q2/21, thanks in large part to pandemic-level comparisons. Using Q1/21 comparisons has slowly removed the exaggerated 'base effect' from global lockdowns and will normalize earnings growth later this year," Ablin noted.
One approach for investors is to seek out "high-quality" companies, he said, which "are currently enjoying a significantly higher profit margin.
"That's beneficial, as companies could potentially get squeezed between higher costs and raising prices," he wrote. "Moreover, many of the highest-quality companies not only pay a healthy dividend but have the wherewithal to pay out consistent and expanding dividends over time."
(Caroline Valetkevitch)
UNITEDHEALTH BEATS OUT META AND NVIDIA IN VALUE RANKING (1245 EDT/1645 GMT)
In a fresh sign of shifting fortunes as the U.S. stock market tumbles this year from its record highs, UnitedHealth Group has now surpassed Meta Platforms and Nvidia to become Wall Street's seventh most valuable company.
UnitedHealth's move up in that ranking follows a 12% loss so far this month for the tech-heavy Nasdaq, far worse than the 7% loss in the S&P 500, which is a better reflection of the broader U.S. stock market.
Facebook-owner Meta Platforms, a component of the once-prized FANG group of soaring megacaps, has slumped 48% this year. Down almost 3% on Wednesday, Meta now has a market capitalization of about $478 billion. Chipmaker Nvidia on Wednesday is off 1.5%, bringing its 2022 decline to 37% and leaving it with a stock market value of about $464 billion.
On the other hand, UnitedHealth has gained about 3% year-to-date (YTD), including Wednesday's 0.7% rise. Its market capitalization now stands at about $486 billion.
UnitedHealth on Wednesday also edged ahead of the value of Johnson & Johnson. Those two healthcare companies' market values have been neck and neck for the past several months, with Johnson & Johnson mostly in the lead.
While investors have worried about rising interest rates and dumped growth stocks this year, healthcare has been a relative refuge, in part due to the perception that people are likely to prioritize spending on their own healthcare regardless of inflation or a potential economic slowdown. The S&P 500 healthcare index has lost 6% so far in 2022, better than most of the 11 sector indexes.
To move further up the ranking of Wall Street's most valuable companies, UnitedHealth would have to knock out Warren Buffett's Berkshire Hathaway, currently valued at over $700 billion.
(Noel Randewich)
IRRATIONAL SELLING: COUNTDOWN TO A MARKET LOW? (1215 EDT/1615 GMT)
Tuesday's sharp equity market losses resulted in an inverted VIX curve. To Brian Reynolds, chief market strategist at Reynolds Strategy, this signaled "the start of irrational selling," which makes it likely that stocks will form a near-term low of some kind.
Reynolds says that with the VIX inversion, investors are paying up for short-term protection even though longer-term protection is cheaper. This should indicate "that stocks are likely to establish some type of significant low in the next two to four weeks."
As Reynolds sees it, Tuesday marked the eighth time the VIX curve has inverted in this bull market, starting in the fall of 2020:
Each of the prior seven inversions was accompanied by some type of significant low, though January and February lows of this year had no followthrough.
Reynolds says he has been of the view that equities were likely going back to the 2010-2016 environment of significant declines within a bull market. He recounts that the S&P 500 fell 20.2% in 2011 when the United States lost its triple-A rating, and also went down 20.2% in 2018 when the Federal Reserve was thought to be "tightening to infinity." In both instances, stocks ultimately recovered.
"Thus, while we have been writing about a move down to the low 4000’s on the S&P which remains our base case, if history were to repeat, another 20.2% would imply a move down to the upper 3700’s before prices begin to move to new highs."
Reynolds also notes that the credit market shuts down when stock investors become irrational. He says that the credit funds the pensions hire are allowed to stop buying during periods of instability in order to await better opportunities.
"That happened during the winter lows, and it is beginning to happen again with the VIX curve inversion this week, as some companies have held off issuing debt because of market conditions."
Thus, with equity investors beginning to appear irrational, Reynolds thinks portfolio managers should begin to think about potential entry points.
(Terence Gabriel)
PLAYING IT COOL: PENDING HOME SALES, MORTGAGE DEMAND, ADVANCE INDICATORS (1108 EDT/1508 GMT)
Data released on Wednesday indicated cooler economic weather, with homebuying demand fading and GDP slowing down.
Signed contracts for the sales of pre-owned homes dropped by 1.2% last month, shallower than the 1.6% consensus drop expected, but extending February's 4% plunge.
The National Association of Realtors' (NAR) pending home sales index considered among the more forward-looking housing market indicators - as pending sales tend to translate into actual sales a month or two down the road - has notched its fifth consecutive monthly decline.
The report falls in lockstep with other recent data, including home prices, home sales, building permits and homebuilder sentiment, all of which suggest the pandemic driven housing boom is on the wane as affordability disintegrates.
"The sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity," writes Lawrence Yun, chief economist at NAR. "The aspiration to purchase a home remains, but the financial capacity has become a major limiting factor."
With thanks to Mr. Yun for providing the perfect segue, mortgage rates leaped to their highest level in nearly 13 years last week, according to the Mortgage Bankers Association (MBA).
The average 30-year fixed contract rate jumped 17 basis points to 5.37%, an altitude not seen since June 2009. This resulted in applications for loans to purchase homes and refinance existing loans to decline by 7.6% and a 9.0%, respectively, for a combined 8.3% slide in overall mortgage demand.
Noting that "overall application activity fell to the lowest level since 2018, with both purchase and refinance applications posting declines," Joel Kan, MBA’s associate vice president of Economic and Industry Forecasting added “Prospective homebuyers have pulled back this spring, as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices."
"The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months."
Mortgage applications have plummeted 51.4% from the same week a year ago.
Finally, the Commerce Department released its advance take on last month's international merchandise trade balance and wholesale inventories.
The gap between the value of goods imported to the U.S. and domestic goods exported to trading partners widened by 17.6% to $125.32 billion.
While both exports and imports increased - by 7.2% and 11.5%, respectively - the uneven demand rebound between the United States and the rest of the world, exacerbated by Russia's war on Ukraine and ongoing restrictions in China to curb new Covid outbreaks, is likely to weigh on first-quarter GDP.
"The contribution from net foreign trade (to GDP) looks set to be about -4.5 percentage points, rather worse than our previous estimate, -3.0pp," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The second quarter will be much better; imports cannot keep rising at their recent pace."
As demonstrated by the graphic below, trade has been a net negative to U.S. economic growth for the last six quarters:
Meanwhile, the merchandise stacked in the warehouses of U.S. wholesalers grew by an encouraging 2.3%, extending February's 1.5% gain.
In fact, it marked the 22nd consecutive month of growth for wholesale inventories, a state of affairs which suggests private inventories are likely contribute to first-quarter GDP's plus column.
"The jump in inventories will offset some of the surprise in the trade deficit," Shepherdson adds. "But you should expect to see downward revisions to forecasts for tomorrow’s Q1 GDP report."
The Commerce Department is due to take its initial stab at first-quarter GDP on Thursday. Economists polled by Reuters expect the U.S. economy to have grown by 1.1% at a quarterly annualized rate in the first three months of the year, marking a sharp deceleration from the fourth quarter's 6.9% growth.
Wall Street pared earlier robust gains and has spent much of the morning session wobbling between red and green.
At last glance, they are all modestly higher.
(Stephen Culp)
WALL STREET NEAR FLAT AFTER SELLOFF DAY BEFORE (1015 EDT/1415 GMT)
Major U.S. stock indexes are little changed on Wednesday after a selloff the day before, with the S&P technology sector among top sector gainers thanks to an upbeat forecast from Microsoft, while Alphabet shares weighed.
Alphabet shares are down more than 4%, a day after it reported first-quarter revenue below expectations.
Microsoft Corp shares are up after late Tuesday it forecast double-digit revenue growth for the next fiscal year. Visa Inc is also up after giving an upbeat outlook.
The tech sector is rising more than 1% early, and nearly all major S&P 500 sectors are showing strength. Communication services, however, is off more than 2%.
Worries about higher interest rates as well as slower global growth have been pressuring stocks and growth shares in particular.
The day's move follows a selloff Tuesday, when the Nasdaq closed at its lowest since December 2020.
Here is the morning market snapshot:
GROWTH ON TAP FOR WORST MONTH VS VALUE IN MORE THAN 2 DECADES (0900 EDT/1300 GMT)
With large-cap tech and FANGs unraveling, April is proving to be one tough month for growth investors. In fact, S&P 500 growth relative to S&P 500 value is on track for its biggest monthly decline since February 2001.
The IGX/IVX ratio has declined 8.3% so far in April, which is its worst month since a 11% swoon in February 2001. Tech, which had a 55% weighting in the SPDR S&P 500 Growth ETF at the end-of-March, is down more than 12% this month, putting it on pace for its biggest monthly decline since October 2008.
Meanwhile, value is proving to be much more resilient amid recent weakness in the major indexes. Of note, the tech-laden Nasdaq is on also pace for its worst monthly drop since October 2008. It is also tracking its worst April since the year 2000, when the infamous Y2K tech-bubble burst.
The three heaviest-weighted sectors in the SPDR S&P 500 Value ETF at the end of March, industrials, healthcare, and financials accounted for around 48% of the value ETF's exposure. The average of these three sector's April declines is only around 6%.
Although still early in 2022, the IGX/IVX ratio's 15.8% year-to-date slide has it on pace to suffer its biggest yearly decline since 2000. Of note, in the wake of the 2000 collapse, growth underperformed value for next six-straight years, though the average yearly rate of descent slowed.
On the plus slide for growth, at least shorter-term, the ratio appears ripe for a bounce. It has reached support at its 2021 lows. And using an RSI, it is oversold on a daily and weekly basis, and on a monthly basis, the indicator is hitting its lowest level since December 2016:
Additionally, since the ratio's monthly RSI moved back above the 30.00 oversold threshold in June 2007, this level acted as support to stem relative growth weakness in 2013 and 2016.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)