To my clients:
It was a mixed week for North American stock markets, with the Canadian TSX finishing down 0.3%: the U.S. Dow Jones Index up 0.9%; and the U.S. S&P 500 up 0.9%.
Interestingly, while economic data continues to slow and likely portends a mild recession later this year, corporate earnings are, in the main, holding up pretty well. With nearly half of companies having reported their Q1 numbers, S&P 500 earnings per share (EPS) are on pace to decline 4.2 percent year over year, better than the consensus forecast made just a few weeks ago of a 6.7 percent decline. Companies are beating the earnings forecast by 6.9 percent, the highest rate since Q3 2021. And revenue growth remain positive at +2.9% year-over-year.
Despite the decent corporate earnings and revenue so far in Q1, it would be silly to expect this resiliency to continue if recession hits. Certainly a recession would lean to further declines in earnings and probably overall revenue contraction as well. But interestingly, if any pending recession is indeed short and shallow – as I suspect – markets will likely look right thorough the recession to the “other side”. Why? Because markets typically anticipate what will happen 9 to 12 months in the future and the future would likely include lower interest rates as the U.S. Federal Reserve looks to jump-start a contracting economy. The world of economics and investment can often seem bewildering, but high quality investments held with a longer-term view will typically weather these shorter-term tempests just fine.
The preceding all said, on economics, the main release this week was first quarter U.S. GDP which grew at a less than expected annualized rate of 1.1%. I’d suspect this rate to decline further as the lagged effect of interest rate increases continue to slow economic activity. Of course I’ll continue to monitor with interest.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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