SUMMARY: We are surveying investors on eco growth and 1Q EPS ahead of next week’s earnings acceleration and FOMC meeting. We keep these surveys VERY short. You can take it HERE.
The January prelim S&P manufacturing PMI beat expectations, rising 50.3 (est 47.6). PMI data show manufacturing prices may be bottoming, consistent with Peter’s view that core goods disinflation is set to slow/fade over 1H24. The official writeup flagged improving new business conditions and outlooks several times. That is consistent with the breadth of macro and earnings data and supports a more risk-on backdrop led by Cyclicals and small(er) caps.
The argument AGAINST a risk-on trend that we see most is that labor flow data (like the JOLTS hire rate) show weakening demand. Our pushback is that there was a hiring surge over the past few years. Topline pressures encourage margin preservation that leads to layoffs. BUT stable PMIs, strong new orders, and improving outlooks do not support continued topline pressures going forward. And margins have 1) expanded, and 2) consistently surprised to the upside (they are 10bps stronger than expected early in 4Q23 reporting).
Stable PMIS are one of the factors contributing to our macro regime model’s ‘Growth’ reading (HERE). The macro regime is more sensitive to yields and yield curves, and that’s also where the biggest deviations are between factors and the macro environment. Yield curve futures indicate the 10s2s will be positive at year end, roughly a +50bp steepener. Value is lagging though. YC futures would indicate an even bigger catchup. That supports laggards with a disconnect between performance and macro variables. Check out more on that HERE.
More in the full report below…
MARKET VIEWS: The preliminary January S&P manufacturing PMI beat expectations yesterday, rising from 47.9 to 50.3 (est 47.6). That was a strong reading and runs counter to weak regional Fed PMIs. Regional surveys have been egregiously volatile post-COVID. Exhibit A – the NY Fed Empire mfg survey is below. It is hard to base any views on a series that volatile.
Peter’s take on the S&P PMI, which is his favorite PMI because of the sample of companies, is that it’s consistent with the troughing and potential bounce in company sentiment. The PMIs show manufacturing prices may be bottoming, consistent with Peter’s view that core goods disinflation is set to slow and mostly fade over 1H24. The official writeup (HERE) flagged improving new business conditions and outlooks several times.
Stable PMIs have contributed to our regime classification model reading ‘Growth.’ The recessionary argument we see most is that labor flow data (like the JOLTS hire rate) show underlying weakness in the labor market. There was a surge in hiring over the past few years, even with slowing growth. Continued topline pressures would eventually mean layoffs to preserve margins. Stable PMIs, strong new orders, and improving outlooks do not support continued topline pressures going forward. And margins have 1) expanded, and 2) consistently surprised to the upside (they are 10bps stronger than expected early in 4Q23 reporting). This all supports a catchup in laggards, particularly those with a disconnect between performance and macro variables. Check out more on that HERE.
Our macro regime model is much more sensitive to yields and yield curves today, and that is also where there are some of the biggest deviations between factor performance and the macro environment. Yield curve futures indicate the 10s2s will be positive at year end, roughly a +50bp steepener. Value is lagging though. Realization of futures would indicate an even bigger catchup.
EARLY EARNINGS: Earnings are providing a support for equities as 4Q reporting season speeds up. EPS beat rates are running just under 80% for the S&P, 85% for Financials, 79% for Industrials, and 100% (only 13 companies) for Tech. Earnings sentiment scores have largely stabilized as well, though there has been some weakening of Early Cyclical sentiment. The bottom line is that the macro headwind concerns coming out of 3Q have not shown up in 4Q reporting, setting up for another stronger than expected set of fundamentals. That is good news and is helping catchup laggards and risk-on factors.
Guidance has been less positive. Net negative sales and earnings guidance levels are at the high end of their normal range and negative EPS guidance is moving higher. Index growth is expected to accelerate into the back half of the year, and weak guidance puts that at risk. Margin sentiment readings are still VERY high, but are rolling over some too. We expect upward revisions to 2024 EPS estimates, in part due to a strong 4Q season that leaves the level of EPS and margins higher than consensus. Earnings need to grow less in 2024 to reach >$240 if final 2023 numbers are $218+ instead of the $216 current expected. What that means is earnings are a support now, but we have to keep a close eye on guidance and sentiment shifts.
FYI Deep Cyclical revisions are by far the weakest. When revisions are atypically negative, it can signal a problem in the sector/group rather than a larger rebound. The bar for Deep Cyclicals to recover beyond a rebound is high.
