Tuesday, September 26, 2023
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Good corporate earnings help smooth path over poor GDP, inflationary data

No major economic slowdown yet, but mixed economic data and disparate corporate earnings have kept investors chugging along, even as experts consistently predict a recession in the second half of 2023.

MANHATTAN (CN) — Showing the best monthly gain since the beginning of the year, Wall Street polished off April in the black despite muddled corporate earnings and mixed inflationary data.

The Dow Jones Industrial closed out the week up 290 points since last Friday’s closing bell, while the Nasdaq gained 154 points and the S&P 500 increased by 36 points.  

On Friday, the latest inflation data from the Bureau of Economic Analysis showed that personal consumption expenditures rose by less than 0.1% last month, a comforting sign. But another report issued on Friday by the U.S. Bureau of Labor Statistics showed that wages and salaries increased 5.1% over the last year, hinting that the Federal Reserve’s efforts to combat price increases has not yet fully worked.

“While inflationary pressures continue to ease, the trajectory is still not moving quickly enough for the Federal Reserve to declare victory,” said Quincy Krosby, chief global strategist at LPL Financial. The Fed is scheduled to meet again next week, during which it likely will announce its final interest rate hike of the year at 0.25%.

Another factor that may affect the Fed’s approach is the lackluster gross domestic product growth, which came in at 1.1% annualized for the first quarter, less than the 2% many experts had forecast. Real GDP increases have shrunk for three straight quarters since the middle of 2022.

“Although underlying activity growth rebounded in the first quarter, while wage and price inflation remained too high, we expect the second quarter to bring a sharper slowdown across the board,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote in an investor’s note Friday morning.

Investors were largely focused earlier in the week on the big names and wildly disparate results among corporate earnings: from record first-quarter profits from Exxon Mobil to the lowest-ever quarterly loss at Intel.

The biggest splash in earnings came on Wednesday from Microsoft, which reported a 7% increase in revenue and a 9% jump in net income last quarter, far surpassing analyst forecasts. The news caused a huge jump the following day in the tech-heavy Nasdaq, which at one point on Wednesday gained nearly 10%.

Microsoft executives chalked much of the gains up to its successful cloud services, which picked up by 13%. “Across the Microsoft Cloud, we are the platform of choice to help customers get the most value out of their digital spend and innovate for this next generation of AI,” CEO Satya Nadella said.

A similar ripple came on Thursday, when Facebook parent company Meta released its earnings. The tech company posted a 3% gain in revenue — 6% year over year — though a 24% decrease in net income over the past quarter. Its forecast for the second quarter, however, was what propelled investors to send the stock the highest point since January of last year.

Meta executives said they expect the second quarter of 2023 to bring in revenue of nearly $30 billion, up to $32 billion. “We had a good quarter and our community continues to grow,” CEO and founder Mark Zuckerberg said in a statement. 

Earlier in the week, earnings did what they could not do the week prior: help boost indices. On Monday, Coca-Cola reported its net revenues increased by 5% and its organic revenue — which doesn’t include revenue from acquisitions — gained 12%, beating analyst forecasts.

More encouraging to investors is that, even while the beverage-maker’s prices grew, demand did not fall. The company reported its overall global case volume grew by 3% in the last quarter, while some its Smartwater brand increased in volume by 8%. The company’s Asia market saw a 10% increase in volume, while the only market in which Coca-Cola saw a drop in volume was in its Europe, Middle East & Africa sector, which fell by 3%.

“We are encouraged by our first-quarter 2023 results,” CEO James Quincey said in a statement. “Our system alignment is stronger than ever, and our networked organization is allowing us to adapt as needed.”

Finally, consumer sentiment for April showed a slight increase, according to the monthly survey by the University of Michigan, inching up to 63.5 from 62 points. The index is still lower than the 65.2 reading from April 2022, as concerns about high prices persist.

“Consumers are bracing for the labor market to weaken,” Joanne Hsu, the survey’s chief economist, said in a statement. “Sustained, meaningful improvements in economic conditions — which will have to come from cooling inflation, given how little room there is for labor markets to strengthen — will be required for their sentiment to rise again.”

Follow @NickRummell
Categories / Economy, Financial, National

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