Kicking the Can, Again

May 16, 2023

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President
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Stocks generally fell last week with the S&P 500 (SPX), Dow Jones Industrial Average (DJIA) and the Russell 2000 marking losses. The notable exception was the growth-oriented NASDAQ Composite (COMP), which was able to eke out a 0.4% gain for the week. Just a handful of mega-cap growth stocks continue to power COMP higher. For the year, COMP is up nearly 18% while DJIA is up just 1.2% and the small-cap focused Russell 2000 is down 0.6%. We continue to believe that a market rally powered by a handful of very large companies is probably not sustainable. To put in perspective just how skewed the market has gotten recently – Apple (AAPL), which is the largest publicly traded company and has a market capitalization of more than $2.7 TRILLION, is now larger than the combined market cap of the entire Russell 2000. Similarly, SPX is outperforming DJIA by 6.5% year-to-date, the widest performance gap between the two indices since 1943, all thanks to the presence of mega-cap stocks in SPX. For the market to make sustainable progress higher, smaller stocks are going to have to participate.

Unfortunately, for smaller stocks to rally they will need to see stronger revenue and earnings performance than is currently being projected by Wall Street analysts. Over time, stock prices tend to follow the path of their underlying earnings — companies that grow their earnings will see their stock price grow as well. In shorter time periods, stocks can buck this trend, but over several years, the relationship between earnings and stock prices is remarkably strong. For the remainder of 2023, analysts expect the top-five largest stocks in SPX to grow their revenue 6%, while the next 495 companies are expected to see just 1% growth. Expectations for 2024 aren’t much better, the five largest are projected to grow revenue 10% versus 2% for the remainder of SPX. If analysts’ projections are even close to being correct, the market will either power its way higher on the back of a few mega-cap stocks, or we will see a pause in the recent rally where the market will trade sideways while valuations normalize. For the first quarter 2023 earnings season, results are coming in better than admittedly low expectations. SPX earnings are now expected to fall 3% year-over-year versus initial estimates of a 7% decline.

Still, risks remain on the downside for earnings given the ongoing stress in the banking sector, which some believe will lead to slowing economic activity, further weighing on corporate results. Last week the Federal Reserve (Fed) released its April Senior Loan Officer Opinion Survey (SLOOS) – a quarterly survey of bank loan officers that provides insight into current credit and lending conditions in the U.S. The survey showed an increase in the share of domestic banks reporting tighter lending standards. Banks had started to tighten lending over the last 12 months and the recent regional bank crisis has quickened the pace of tightening. Demand for commercial loans is approaching depressed levels seen during the pandemic. Tighter lending standards will have knock-on effects for the U.S. economy. First, small- and medium-sized businesses will be less likely to invest in growth because funding that growth is now, either not possible, or much more expensive than it was just a year ago. The second is that less investment in economic growth will continue to push down inflation. The worry now is that a combination of less lending paired with the tighter monetary policy that the Fed has already pursued will be enough to cause an economic downturn.

Speaking of inflation, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) for the month of April were released last week. Both reports suggested that inflation continues to cool, even if progress is frustratingly slow. Year-over-year CPI numbers moderated for the 10th straight month, falling to a 4.9% increase compared to March’s 5% figure. PPI showed similar progress with a 2.3% increase versus last year’s numbers, and down from 2.7% in March. Prices of services have proven to be stubbornly sticky despite the Fed’s best efforts to bring them down. It appears that progress is starting to take hold as “super-core” inflation – which excludes food, energy, and rent prices – increased just 0.1% in April. Still housing prices are up 7.5% year-over-year and look poised to remain elevated as rent prices catch up to home prices that shot up during the pandemic.

Perhaps the most pivotal thing on investors’ minds in the coming weeks will be the fight over the U.S. debt ceiling where Republicans and Democrats are facing off over the nation’s debt limit and how to treat future government spending. Democrats have warned that threatening default on U.S. debt is a disastrous proposition and should be avoided at all costs before discussing the U.S. budget deficit. Republicans however, plan on using the looming prospect of default as a tool to achieve long desired spending cuts and deficit reduction. Both sides have valid concerns. A default on the nation’s debt would undermine the U.S.’s status as the world’s most stable government borrower and could adversely impact our ability to issue government debt in the future. The lasting impact of a default is unknowable but would be undoubtedly significant. At the same time, nearly all parties involved agree that the current federal budget deficit is a problem. The difference is in how each side thinks the problem should be solved. Republicans would like to see spending cuts while Democrats would like to see higher taxes. Negotiations between Republicans, Democrats, and the White House are ongoing, but progress has been slow so far. Standoffs over the nation’s debt ceiling have become increasingly commonplace, but this set of negotiations feels similar to 2011 when the U.S. narrowly averted a default and the country’s credit rating was downgraded from AAA status. Leading up to the 2011 deadline, stocks sold off sharply as investors worried that another financial crisis was waiting in the wings. The most likely outcome is an extension of the debt ceiling – a proverbial kicking of the can down the road – until September. However, if progress is sufficiently slow, the threat of default could be the straw that breaks the market’s back.

The coming week will feature the tail end of the first quarter’s earnings season with just a few major companies reporting results. Several Fed officials will speak, and a variety housing data will be released throughout the week. Leading Economic Indicators are scheduled for release on Thursday morning and have seen negative readings for nearly a year straight. Expectations are for another negative number.

Date Report



Monday 5/15/2023 Empire State Manufacturing Survey 10.5 -5.0
Tuesday 5/16/2023 U.S. Retail Sales -1.0% +0.8%
Industrial Production +0.4% +0.1%
Capacity Utilization 79.8% 79.7%
Homebuilder Confidence Index 45 45
Wednesday 5/17/2023 Housing Starts 1.42M 1.40M
Building Permits 1.41M 1.43M
Thursday 5/18/2023 Initial Jobless Claims 264,000 255,000
Continuing Jobless Claims 1.81M
U.S. Leading Economic Indicators -1.2% -0.6%
Existing Home Sales (annualized) 4.44M 4.26M
Friday 5/19/2023


Links to previously published commentaries can be found at Investment Insights/Weekly Market Commentary/Market