In March, the financial markets underwent varying experiences depending on one’s perspective, with mega caps seeing a decent performance while small and micro caps faced turbulence. Despite a rally in stocks during the first quarter, the onset of 1Q earnings cast a shadow on the market. Companies across industries, despite key earnings metrics running above their one-year averages, reported negative linearity in Q1, and rewards for earnings beats were notably below the four-quarter average. The US Debt ceiling standoff heightened market tensions, evident in the US CDS market, where rates reached levels not seen since the 2008 crisis. Concerns surrounding the Treasury’s “x-date” ranged from July to mid-August, impacting both the CDS market and short-term treasuries.
Q1 GDP came in at 1.1%, below the consensus of 2.0%, but personal consumption expenditure growth was robust at 3.7%. Headline inflation remained elevated, with CPI MoM reporting a 0.1% increase, slightly below the estimate, and a YoY increase of 5.0%. The core PCE Price Index, the Fed’s preferred inflation measure, remained elevated, potentially influencing the Fed’s rate-hike cycle. The personal savings rate increased to 5.1%, reflecting consumer concerns about a potential recession.
April witnessed the first half of 1Q ’23 earnings prints, with S&P 500 companies reporting their best performance relative to analyst expectations since the end of 2021. Mega and large caps sharply outperformed small and micro caps on a total return basis. Sector-wise, Communications stocks led with a 3.8% gain, while Industrials were the worst-performing sector, ending lower by 1.2%.
Gold reached new highs, while M2 experienced a contraction, and investors flocked to hard commodities like gold amidst uncertainties. Despite mixed Q1 earnings results, with 66% of companies beating revenue estimates, the average beat was under 2.1%. On the growth front, 68% reported revenue growth, while earnings growth was mixed, with only 58% reporting growth. The forward 12-month PE for the S&P 500 is 18.1, slightly below the five-year average but above the 10-year average.
The yield curve and Fed expectations became focal points, with the yield curve experiencing attention-grabbing volatility, and implied overnight rates signaling a dynamic environment. Overall, the month highlighted the complexity of market dynamics, encompassing economic indicators, earnings reports, and geopolitical factors.