The Weekly Wrap: January 9, 2023

Week in Review

The first week of 2023 was nothing like what investors experienced in the prior year. Stock prices jumped, led by nearly identical gains of almost 1.5% from the Dow Jones Industrial Average and the S&P 500. The Nasdaq rose 1%. Bond prices jumped, too, with the 10 year Treasury gaining 1.7%. Bitcoin rallied 3%, and gold climbed 2.3%. Seemingly, the only asset not to participate in the fun was crude oil, which plunged a whopping 8% to start the year.

The labor market is sending mixed messages to a Federal Reserve that’s trying to slow the economy and put a lid on consumer prices. Last week, the Bureau of Labor Statistics reported an additional 223,000 jobs were added to the US economy in December. That confirmed a similar estimate from ADP a few days prior and seems consistent with the more than 1.7 job openings for every unemployed worker. Meanwhile, continuing jobless claims are rising at a pace consistent with the start of past recessions, and the growth of average hourly earnings declined to 4.6%, the lowest rate since 2021.

Earnings Expectations and Valuation

The equity selloff in 2022 was not matched by a proportionate decline in earnings estimates. That drove the S&P 500’s forward price-to-earnings ratio from a historically elevated level of 23x to nearly 15x at its lows. Current valuations are near historical averages, reflecting an expectation that earnings will grow near an average rate, too.

Earnings growth for large cap US stocks is expected to end the year at 7%, backed by a 3% increase in revenues and notable margin expansion. That earnings growth rate is in-line with the long-term average. In 2024, the consensus expectation is for an additional 9% earnings growth, but that estimate relies on profit margins reaching new highs.

What’s Ahead

There aren’t many items on the economic calendar for next week, but the few we have are worth watching closely. The most important will be Thursday’s update on consumer prices for December. Then we’ll see how rising prices are impacting public perception, when the University of Michigan publishes its consumer sentiment results on Friday, including inflation expectation. The National Federation of Independent Business also releases results from its small business owners survey on Tuesday.

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