MANHATTAN (CN) — The three major U.S. indices held steady this week amid a split on Wall Street on the potential for a recession in the second quarter of 2023.
By the market close on Friday, the Dow Jones Industrial Average lost 77 points, while the S&P 500 just four points and the Nasdaq fell 51 points.
“Early signs are that tighter banking lending standards are beginning to bite, but the full hit to activity wont’ be evidence until later this year,” wrote Michael Pierce, lead U.S. economist at Oxford Economics, noting that nearly all the growth during the first quarter happened in January.
Next week looks to be bigger in terms of major corporate earnings, but this week’s releases further indicate an economic slowdown. “As usual, most earnings are beating lowered guesstimates from Wall Street analysts, but at a lower rate than prior periods,” James Vogt at Tower Bridge Advisors wrote. “Clearly, we are already in an earnings recession after [fourth quarter 2022] saw similar declines.”
The biggest name watched this week was Tesla, which saw $50 billion of its market cap evaporate after its first-quarter earnings report stated that both its total revenue and net income had plummeted by nearly one-fourth since the same time in 2022, while the company’s free cash flow had fallen by 80%.
While price reductions likely had an impact on those numbers, Tesla noted its near-term pricing strategy will focus on the long view that each vehicle has a potential lifetime value. “In this environment, we believe it makes sense to push forward to ensure we lay a proper foundation for the best possible future,” the company said in a statement.
The other major sector for earnings this week was financials. Investment bank Goldman Sachs reported $12.2 billion in net revenues and $3.2 billion net earnings for the first quarter, both of which were lower than what analysts had forecast, which some attributed to the banking crisis last month. Despite this, CEO David Solomon said in a statement the bank is “operating from a position of strength” and has a “robust capital position.”
On the flip side, Bank of America’s earnings for the first quarter topped expectations. The bank reported net income of $8.2 billion last quarter, with revenue increasing 13% year over year and marking its seventh straight quarter of operating leverage. The report also notes a $33 billion decline in client balances, however, and the bank has set aside $931 million for anticipated credit losses.
“Every business segment performed well as well grew client relationships and accounts organically and at a strong pace,” CEO Brian Moynihan said in a statement.
Despite the lukewarm earnings — and the likelihood that next week’s glut of earnings will reflect similar data — indices have been grinding upwards since they hit lows last fall.
The S&P 500, in particular, has done well over the past few weeks, gaining about 200 points since mid-March. As a whole, though, the index declined during the first quarter and has seen a year-over-year decrease of 6.5%. That has experts split on what to expect for the second quarter.
“The S&P 500 is coming in hot to Q1 earnings season,” said Adam Turnquist, chief technical strategist for LPL Financial, noting that since 2000 there have been 27 other quarters when the S&P 500 has rallied at least 3% four weeks before earnings season. “These outlier returns historically point to continued upside momentum for the index after the kickoff of earnings season, albeit at a moderated pace.”
According to an analysis of earnings earlier this week, John Butters, senior earnings analyst at FactSet, wrote the 6.5% decline in first-quarter earnings on the S&P 500 is the largest earnings decline since the second quarter of 2020 and the second straight quarter the S&P has marked a drop in earnings.
Several economic measures also have experts worried. The Federal Reserve’s Beige Book, which measures economic conditions across the central bank’s 12 districts, reported that economic activity was “little changed” in early April and manufacturing and real estate had flattened.
Housing is a bit of a mixed bag right now, with the decline in mortgage interest rates helping stabilize the market. On Monday, the National Association of Home Builders’ homebuilder sentiment for April showed a rebound in mortgage applications, and its housing market index increased slightly for the fourth consecutive month.
Existing home sales fell 2.4% last month, as well as median existing-home-sale prices dropping 0.9% from the same point in 2022, according to the National Association of Realtors. Many believe the lack of inventory has kept prices high, but high interest rates may eventually cause prices to fall further.
Finally, unemployment claims are still increasing but just barely. Initial claims for the week ending April 15 increased by only 5,000 claims, with the four-week average basically flat. Those numbers are expected to rise in the next few months, but it is unclear by how much.
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