Bad Market Breadth Is Threatening Stocks

Stocks climbed moderately higher this morning as earnings continued to roll in. Last evening, Tesla (NASDAQ: TSLA) shares surged after hours following major “beats” on both EPS ($3.22 vs. 2.26 expected) and revenue ($18.76 billion vs. $17.80 billion expected).

TSLA traded as much as 11% higher this morning in response. Other tech stocks were lifted as well.

“I’m cautiously optimistic that earnings will keep beating, with a couple of outliers,” said Jeff Kilburg, chief investment officer at Sanctuary Wealth.

″‘Boring’ names – American staple names that we forgot about – are doing better than expected.”

He then discussed IBM’s blast higher after the company reported earnings yesterday.

“It’s a big divergence from sentiment, especially with the 10-year [Treasury yield] nearly doubling. The shift from growth to value is really hitting its stride.”

Airlines were up big this morning, too, after beating estimates and upgrading full-year guidance. United Airlines (NYSE: UAL) CEO Scott Kirby said the company had never seen “such a hockey-stick increase of demand.”

But stocks gave up some of their morning gains as the market’s most important man, Fed Chairman Jerome Powell, prepared to deliver comments at the International Monetary Fund Debate on the Global Economy. Powell’s set to speak at 1 pm EST and is expected to cover the Fed’s aggressive rate hike schedule.

“The big question is whether the earnings can really sustain this kind of a macro backdrop of slower growth and [tighter] Fed policy,” said Deepak Puri, Deutsche Bank wealth management chief investment officer. ”

“It seems certain companies can. Historically, that’s been the case. What’s different this time is really the trifecta, which is higher costs of capital, quantitative tightening, plus a lack of […] a big fiscal stimulus.”

The last time the Fed tried to raise rates was back in 2017/2018. The market continued rising in spite of the rate hikes until late 2018 when stocks ultimately slumped through the holiday season. A corporate tax rate cut helped cushion the blow of the rate hikes for much of the year.

Now, though, Puri argues the market is in a different – and more difficult – situation as the Fed looks to tighten policy.

“This time around, I’m not really seeing much fiscal spending coming our way,” he said.

“So it could be one of those times where the market might be a little bit more volatile than what participants expect.”

If Powell seems like he’s shifting more hawkish in his remarks this afternoon, stocks could very well see an even deeper retracement into the close. Traders endured several massive intraday reversals in March. More could be coming as Powell and earnings cause sentiment to whipsaw from session to session.

And, with 5 of the market’s 6 biggest names set to report earnings from April 26th to the 28th, a “make or break” moment for stocks is likely approaching.

“Here’s the biggest risk in my opinion to the broader market right now: The broader market is concentrated in just a handful of names. What happens if their earnings or guidance for the second quarter is very dismal, or if they have a second-quarter earnings report […] that really surprises to the downside? That’s when you’ll see that downdraft in the S&P, in my opinion,” observed Eddie Ghabour, co-founder and managing partner at Key Advisors Group.

“No one is bulletproof in this environment,” he concluded.

If the S&P can finish out the current week on a high note, however, a short-term rally seems inevitable. Provided, of course, Powell doesn’t dash bullish hopes when he addresses the IMF later today.


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