Markets calm ahead of a surge in earnings releases

Thoughts

• Investors remain confused about the forward direction of the market but are less reactive and emotional. Equity markets have entered a period of calm not experienced since August of 2021, with the VIX below 17 and the S&P 500® Index delivering weekly moves of less than 1% for three-straight weeks. The S&P 500 is fractionally higher in April, hovering near the highs of the year, though bears continue to point to macro uncertainty and earnings risk. A gain in April would be the fifth gain in seven months, with a total return of 15%.
• Despite a strong year-to-date return for markets, institutional investors remain stubbornly pessimistic and underweight equities. Hedge funds are the most short S&P 500 futures since October 2011 and 10-year Treasury futures in history. According to the BofA Global Fund Manager Survey, bond allocations are the most overweight, and equity allocations are the most underweight since March 2009. Sentiment turned lower in April to the lowest level this year, hovering near the lowest level in the 20+ year history of the survey. Cash levels were steady at 5.5%, well above the long-term average of 4.7%. A CNBC survey showed that 69% of the public have negative views on the economy, and only 24% (record low in the 17-year history of the survey) say now is a good time to purchase stocks.
• Even with high levels of pessimism, this market environment feels different from any one we’ve seen since the pandemic. Despite an unrelenting news cycle – including a banking industry “collapse,” an uncertain earnings season, questions about whether the Fed will continue to raise interest rates, and fears of a debt ceiling showdown – the market isn’t moving. We view that as good news.

What to Watch

• Investors are bracing for tech earnings this week, with all eyes on Microsoft, Amazon, Meta and Alphabet. We’ve seen a rally from these companies this year, but their earnings reports will show if these strong gains will continue in the current economic environment. There’s a lot of optimism priced into their shares, so we may be surprised by the results.
• Earnings will be the primary market driver this week, with 40% of the S&P 500 companies reporting. Economic data include new home sales and consumer confidence on Tuesday, durable goods on Wednesday, first-quarter GDP and pending home sales on Thursday, and the PCE deflator on Friday.