WEEKLY MARKET UPDATE

Bears keep predicting a sharp decline in earnings, but once again corporate profits, while down, have been resilient as almost 80% of S&P 500 companies that have reported in Q1 have exceeded earnings per share (EPS) expectations.  The mega cap companies have been particular sources of strength and this week we saw Microsoft, Meta, and Alphabet report and remind markets of why investors have recently gravitated towards these durable business models.  The first quarter (Q1) earnings season is now 53% complete and earnings are on pace to decline -3.7% year-over-year, versus the consensus estimate from analysts of -6.7% on March 31 (per FactSet). 
 
As a result, the S&P 500 rose about 0.8% on the week, but investors had to contend with some notable headwinds.  For example, concerns around the banking sector were exacerbated on Monday evening when the regional bank, First Republic Bank, reported results that showed deposits had declined far more than anticipated.  In addition, the debt ceiling stalemate is becoming more of an overhang, as weak tax collection indications have caused Wall Street to move up the so called “X-date”, or date when the government can no longer pay its bills, to June or July.  However, this market seems to feed off skepticism and continues to climb a wall of worry.  Next week is headlined by the Federal Reserve likely raising interest rates by another twenty-five basis points (0.25%) on Wednesday and earnings from Apple on Thursday.

SIGNS OF GLUTTONY OR CONSUMER RESILIENCE?

While American consumers cut their retail spending for the second straight month in March, we wanted to highlight something on the "lighter” side, the French fry market.  On Tuesday, McDonald’s reported much stronger than anticipated earnings, but the CEO’s mention on the conference call of a “fry attachment rate” perhaps stole the show.  Essentially, the fry attachment rate is the clip at which customers order fries when visiting a restaurant and is tracked by frozen potato company Lamb Weston.  Apparently the “fry attachment rate” has remained very solid and most recent figures show 24% of orders see consumers add fries, up from 22% before the pandemic.  To be clear, we are not positioning portfolios in any way due to indications of this obscure metric, but found this to be an amusing example of how nuanced consumer behavior can be.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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