This morning, we received a couple of important reports on the economy. At 8:30 A.M. (EDT), the Commerce Department reported the nation’s gross domestic product (GDP) advanced at an estimated annualized rate of 1.6% in the first quarter. That figure was the weakest reading since 2022 and included a notable increase in the Personal Consumption Expenditures (PCE) Price Index, which is the assessment of inflation most closely tracked by the Federal Reserve. Meanwhile, the Labor Department reported that initial unemployment claims for the week ending April 20^th totaled 207,000, down 5,000 from the previous week’s tally and still indicative of a tight labor market. The equity futures, which were notably lower heading into the economic news on some mostly disappointing corporate reports, took another step lower on the latest data points.  

The first-quarter GDP data raised some concerns about stagflation, which occurs when you have a decrease in economic growth, along with increases in inflation and unemployment. The employment situation still remains solid, but the question will be is this sustainable if growth is slowing. The GDP report puts the focus on tomorrow’s report on March personal income and spending, which includes the latest PCE reading. This will bring more clues about the direction of inflation over the first three months of 2024.

However, until we get to the PCE release, the market is taking a lot of its cues from Corporate America. This week has brought a plethora of earnings reports from the S&P 500 companies. And since the close of trading yesterday afternoon, we have received a number of prominent reports, including the latest quarterly results from technology behemoth Meta Platforms (META), which kicks off the run of “Big Tech” earnings releases. The parent company of Facebook beat expectations on both the top and bottom lines with earnings per share coming in at $4.71, versus the Wall Street consensus estimate of $4.32. However, the stock is trading lower in pre-market action on slightly weaker-than-expected revenue at the midpoint of guidance and raised expense expectations for the full year. 

Beyond the headline report from Meta Platforms, we also learned that International Business Machines (IBM) beat bottom-line expectations in the latest quarter, but revenues came in lighter than forecast, hurt by services revenues and negative foreign currency translation. The company also reported that it is acquiring HashiCorp for nearly $5 billion in a move to strengthen its hybrid cloud offerings and increase its AI capabilities. Shares of Big Blue are looking at a lower opening when trading kicks off stateside. Shares of ServiceNow (NOW) also are facing a lower start after the tech company reduced its forecast of full-year subscriptions.  Conversely, shares of Chipotle Mexican Grill (CMG) are pointing to a higher opening after the fast-food restaurant chain posted strong results and raised its full-year guidance.

Within the Dow 30, shares of industrial giant Caterpillar (CAT) and pharmaceutical concern Merck (MRK) are moving in opposite directions following their earnings releases. Specifically, the performance of CAT stock is responsible for a big chunk of the index of 30 bellwether companies’ indicated decline.   

In general, we think companies that produce weaker-than-expected results and/or issue reduced near-term prognostications will be penalized by Wall Street. On the other hand, those entities that exceeded expectations in the latest quarter or raised their forecasts for revenue/profits will find support. Our sense is that those companies that have demonstrated a history of generating steady earnings and cash flow growth will remain in demand, especially for investors who are becoming more risk adverse as volatility picks up notably. That said …

One thing that investors should keep in mind as first-quarter earnings season progresses is the impact of the stronger dollar on the results of the multinational companies that do a good portion of their business overseas. The stronger greenback reduces foreign revenue and profits when converted back into U.S. dollars. This could lead to weaker-than-expected top- and bottom-line results at some of the multinationals and ultimately reduce the appeal of their stocks, as we saw with the reaction to IBM’s results yesterday afternoon.   - William G. Ferguson

At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.