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Earnings to the rescue, as Wall Street breaks cold snap

Markets turned a corner to finally pull out a win this week, suggesting an economic turnaround may lie ahead.

MANHATTAN (CN) — Following eight weeks of straight losses, Wall Street recovered this week after a raft of extremely positive corporate earnings and government data showing improving inflation.

Most of the gains came on Thursday, but compounded increases on Friday helped the week end on a positive note. By the closing bell on Friday, the Dow Jones Industrial Average gained a whopping 1,952 points for the week, the S&P 500 increased 257 points, and the Nasdaq — hit by a recent tech rout — netted 777 points.

As in recent weeks when investors started to fall into a funk, positive corporate earnings buoyed market confidence and led to the rally. This week it was retailers. In its earnings release, Macy’s reported $286 million in first-quarter profits, above analyst expectations, based on $5.3 billion in net sales, about $640 million more than this time last year.

“While macroeconomic pressures on consumer spending increased during the quarter, our customers continued to shop,” CEO Jeff Gennette said in a statement. “We saw a notable shift back to occasion-based apparel and in-store shopping, as well as continued strength in sales of luxury goods.”

Even more impressive were earnings reports by discount retailers Dollar General and Dollar Tree, both of which saw their shares rise by double-digit percentages on Thursday after earnings were released.

For the former company, net sales increased 4.2% to hit $8.8 billion in the first quarter of 2022, predicting a 10% increase in net sales growth during Q2. “Despite ongoing headwinds due to supply chain pressures and heightened inflation, we remained focused on controlling what we can control and delivered solid financial results, which exceeded our expectations for sales and [earnings per share] for the quarter,” said CEO Todd Vasos.

Dollar Tree reported a 6.5% increase to its net sales during the company’s first quarter, compared with about half a billion dollars less during its first quarter in 2021. The company’s gross profits gained 19.2% over that period, with net income increasing 43.2%.

Tom Essaye of the Sevens Report wrote in an investor’s note on Friday morning that “seeing the parts of the market that have been hit the hardest begin to recover is an early step towards this market putting a more formidable bottom in, as we will need to see some real risk appetites reappear.”

The Federal Reserve plans to tighten policy after interest rate hikes this summer, according to recently released minutes. Essaye said that could help to “serve as a catalyst for such a near-term bottom forming — especially with economic data not being as bad ad previously feared, inflation expectations holding steady, and likely overdone recession fears potentially subsiding near term.”

On Wednesday, the Fed released the minutes from the May meeting of the Federal Open Markets Committee, during which most participants said they want three more rate increases of at least 0.5% during the summer months. However, the minutes also noted many participants say “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”

The current federal funds interest rate is at 0.75% to 1%. A neutral interest rate would be around 2.4%, which the Fed could achieve in three more rate hikes of half a percentage point. A restrictive policy would mean an interest rate above the neutral.

But some say Fed also could pare back its interest rate hikes. “The FOMC will likely hike by 50 [basis points] at their upcoming meeting, but if growth prospects falter, the FOMC could likely revert to more conservative 25 basis point hikes in subsequent meetings,” said Jeffrey Roach, chief economist for LPL Financial.

On Friday, optimistic inflation data may support an additional 50-point hike. According to the Bureau of Economic Analysis, personal consumption expenditures increased by just 0.9% in April, while core PCE — which excludes food and energy prices — rose by 4.9% after a 5.2% increase in March.

The lessening of inflation was a boon for some analysts. “Consumer spending is still the main U.S. growth driver,” wrote James Knightley, chief international economist at ING. “While incomes are not keeping pace with the rising cost of living, today’s data suggests households are prepared to run down some of their accumulated savings to maintain lifestyles.”

Knightley said he expects inflation to slowly drop back to the target 2%, adding that “inflation is likely to be sticky” and should provide cover should the Fed choose to move in a restrictive manner heading into early 2023.

A duo of reports this week meanwhile gave a less inspiring view of consumer sentiment as compared with earnings and inflation. On Friday, the University of Michigan’s monthly survey showed consumer sentiment dropped from 65.2 points in April to 58.4 points this month, a 10% decline.

“While consumers appear confident about their own finances, they continue to voice strong concerns about the economy around them,” said the survey’s chief economist, Joanne Hsu. “Feelings of personal stability have supported resilience in spending thus far, but persistently negative views of the economy may come to dominate personal factors in influencing consumer behavior in the future.”

In the Morning Consult’s own index, consumer sentiment fell to a series low of 78 points. The index is now more than 24 points below its pandemic-era high from May 2021, though the biggest drop in confidence was among older Americans.

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