Focused On The Fed The FOMC meeting came and went and left the market reeling in its wake. The committee did not alter policy, as expected, but did come out with a slightly more hawkish commentary than most were looking for. The FOMC, as wishy-washy as the comments were, said the first hike would come in March and that they may be on the aggressive side due to persistent inflationary pressures. This is no surprise to us but it did cause the market to fall and retest the lows set on Monday which were new lows in and of themselves. Now, with the SPX (NYSEARCA: SPY) trying to find support at or near those same lows and above a key support level there is a risk of a much deeper correction. The bulls are putting up a good fight at the 4,300 level but inflows seem to be waning and bearish pressure mounting. A fall below this level could double the decline to 1200 points which would put the index at the 3700 level. This level is coincident with an interesting candle formation from early 2021 where support may be strong. Regardless, this would put the index at -24% and counting, relative to the recent highs, and it is possible the index could fall even further. The meteoric rise in market value during 2020 and 2021 is due to massive inflows of cash related to stimulus spending, both corporate and public aid, and now that cash is moving out of the market. The question is whether this movement will reverse sooner or later, and if the S&P 500 will fall back to the long-term trend or merely consolidated to the side until it catches back up with it. The S&P 500 chart of weekly candles is our chart of the week.
 Inflation and the FOMC are still the biggest risks to the market. While the long-term outlook for stock market prices is bullish due to the outlook for economic growth there is a near-term reset in action. That reset has a lot to do with when, how much, and how fast the Fed raises interest rates and the expectations for that are only growing. The PCE Price Index for January was released two days after the Fed meeting and it showed another unexpected increase in YOY consumer-level inflation at both the headline and core levels. The CME’s Fedwatch Tool now shows a 100% chance for at least one hike in March and possibly two. The odds for two hikes by May stands at 80%, up from just 30% one month ago, and the odds of three hikes by June are sitting at 75% and rising. We still think there will be two hikes in March and then we’ll see. The good news is that supply chain issues are starting to improve, at least according to Apple (NASDAQ: AAPL) CEO Tim Cook. While there are glimmers of hope throughout the market it is still too soon to tell and, even if they are improving, the Q1 results are not expected to show it. This Is What To Expect In The Week To Come Another Round Of Important Economic Data Aside from the inflation and jobless claims data the last week’s economic data was good. New homes sales were strong, consumer confidence remains high, and the 4th quarter GDP was above consensus. As for the claims data, it’s not that it was bad it’s that we’re still not seeing the declines in claims and total joblessness that other data suggests is possible. The takeaway is that total jobless claims appear to be stabilizing at a higher level than pre-pandemic and are about to make a seasonally expected uptick. The question now is high the uptick will go and how low the next dip will be. This week we’re looking for another busy week in terms of the data. On the manufacturing front, there is Factory Orders, PMI, and ISM while on the housing front Construction Spending. This will be balanced out by five key labor market reports including the weekly claims figures, the ADP report, the Challenger, Gray & Christmas report on layoffs, the JOLTs report on job openings and the all-important NFP. We are not expecting much strength in the NFP, something in the 250,000 to 500,000 range, with another small dip in unemployment and an increase in wages. Peak Earnings Season Comes To A Boil Peak earnings season is here and will come to a boil this week. This week marks the beginning of the peak of peak season with the bulk of S&P 500 companies slated to report within the next 21 days. The good news is that, so far, most companies are beating on the top and the bottom lines. The bad news is that the margins of outperformance have been very slim in most cases and the outlook shows the strain of inflation. What this means is that earnings growth is going to continue but the acceleration of growth has stopped and stagnation may not be far behind it. As it stands, with about 11.5% of the index reporting, the blended rate of earnings growth (which includes company’s that have reported and the estimates for those that haven’t) stands at 21.8%. This is the fastest pace for the consensus in several months but still just flat over the past two quarters and the forward outlook is equally tepid. The consensus figures for Q1 and Q2 have not budged in weeks and are dragging on sentiment. Remember, no matter what else is going on in the world, it is the outlook for future earnings and earnings growth that drives the stock market. Everything else is just noise. If the outlook doesn’t improve the broad market sell-off could easily gain momentum. Our Focus List For The Week As busy as the week is Monday looks like a dud in regards to interesting earnings reports. Our focus list will start on Tuesday instead with a report from United Parcel Service (NYSE: UPS). UPS is riding a wave of strong demand while improving operations and raising prices so we are expecting a good report. The question is whether rising costs are cutting into profitability and what the outlook for earnings is for the rest of the year. The analysts are expecting revenue to jump about 8.7% YOY and we think that is light. Scotts-Miracle Gro (NYSE: SMG) is also expected to report on Tuesday and deliver a strong report as well. The analysts are expecting to see not only a double-digit year-over-year decline in sales due to diminishing tailwinds but for a seasonally-expected loss. In our view, the tailwinds driving business are still in place and business contraction will be much less than expected. Advanced Micro Devices (NASDAQ: AMD) reports on Tuesday night and should also deliver a strong report. The entire chip sector is seeing massive demand so there is no reason why the company should report sequential or YOY declines in revenue. The problem is that so much of the market is expecting strength it may take an overly large beat to get the market moving. Emerson Electric Co. (NYSE: EMR) reports on Wednesday morning and should also outpace the consensus estimates by a wide margin. The company makes a wide range of electronic components for business and industry and has seen a sustained uptick in demand in the wake of the pandemic. The analysts are expecting to see revenue fall sequentially but we do not agree. Based on demand and backlogs, we see this company’s revenue holding flat if not growing on a sequential basis. AbbVie (NYSE: ABBV) is expected to grow revenue sequentially and YOY and the estimates may be too low. Not only are medical procedures on the rise but the company has several new products on the market that should drive revenue gains. More importantly, there have been several FDA approvals in recent weeks including expanded use of key treatments to aid revenue growth this quarter and next year. Shares of AbbVie are tickling new highs right now. Ford (NYSE: F) rounds out our list with a report on Friday morning. The nations oldest continuously operating automaker is expected to feel the pain of supply chain issues but that’s not what we’re interested in. The company’s push into EV is taking the market by storm and may propel the company into the #1 spot over the next year or two. We’re interested in updates to the Lighting and when to expect production ramps to truly begin. Until then, remember the trend! Thomas Hughes
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