Companies seem confident about their “near-term earnings power,” says DataTrek's Nicholas Colas.
U.S. stocks historically rise around the Federal Reserve's annual Jackson Hole Economic Policy Symposium - a gathering this week that will be closely watched by investors on Friday, when Fed Chair Jerome Powell is scheduled to give a speech, according to DataTrek Research.
"The S&P 500 tends to rally over the 2 weeks on either side of the Fed's Jackson Hole conference, with returns coming mostly after the Chair's speech," said DataTrek co-founder Nicholas Colas in a note emailed Monday. "We expect to see the same pattern this year."
The Jackson Hole Economic Policy Symposium, a gathering of central bankers and economists in Jackson Hole, Wyo., will be held this week on Aug. 22-24. Powell is scheduled to speak at the retreat on Friday at 10 a.m. Eastern time.
The S&P 500, a gauge of U.S. large-cap stocks, has averaged a 0.9% return over the two-week period around Jackson Hole since 2010, according to DataTrek. "Fed Chairs don't always attend, and we have noted those years," Colas said, referring to the table below.
DataTrek considers 2022, when the S&P 500 saw a big slump around the time of Jackson Hole, as "an outlier year given the Fed's aggressive monetary policy" aimed at taming high inflation with a series of interest-rate hikes.
Powell's 2022 Jackson Hole speech "surprised markets," as he signaled the Fed would do whatever it takes to bring down inflation, according to Colas. Powell also warned at the time that higher rates would probably lead to "some pain to households and businesses," as the Fed's tightening of monetary policy would likely slow growth and soften the labor market.
Now, investors are anticipating rate cuts from the Fed, as inflation has eased substantially and concerns about the economy increased following a recent softening in the U.S. jobs market.
"Market expectations for Fed rate cuts later this year are very high," Colas said. "Powell should be reassuring enough on the topic this Friday to see the typical 'Jackson Hole Drift' higher over the next 2 weeks."
The S&P 500 saw a strong rally last week, finishing Friday 2% below its record closing high on July 16, according to Dow Jones Market Data. The U.S. stock market rebounded after worries over a softer-than-expected jobs report earlier this month sparked a selloff.
Ahead of his highly anticipated Jackson Hole speech, Powell "knows markets are coming off a volatile few weeks and will therefore want to choose his words carefully," said Colas.
Meanwhile, companies don't seem all that worried about a recession in the near term, at least judging by their recent earnings calls, according to DataTrek.
Six percent of S&P 500 companies mentioned "recession" during their calls with investors and analysts about their second-quarter earnings results, which is "quite low," said Colas.
"That is not so much an economic observation as a signal that corporate managements remain confident in their companies' near-term earnings power," Colas said. "If there were any need to excuse either earnings misses or reduced forward guidance, we would certainly be hearing more about recession looming somewhere just over the horizon."
By contrast, the "pandemic recession" in the first quarter of 2020 saw 42% of S&P 500 companies cite "recession" in their investor calls for that period, according to the DataTrek note, which cited FactSet data in the chart below.
During the "technical recession" in the U.S. in the first half of 2022, when gross domestic product was "negative" for two straight quarters, mentions of "recession" peaked at 47% in the second quarter of that year, the DataTrek note shows.
Such mentions remained elevated for the remainder of 2022, despite the U.S. economy "clearly not experiencing" a recession as defined by the National Bureau of Economic Research, said Colas. He noted that a recession amounts to "a significant decline in economic activity that lasts more than a few months and is spread across the economy."
In Colas's view, "the managements of S&P 500 companies, facing difficult 2021 comparisons in 2022, used 'recession' as an excuse for the contraction in their earnings."
Investors on Thursday will see flash readings on the U.S. manufacturing and services sectors this month from S&P Global's purchasing managers' index. That same day, weekly data on initial jobless claims in the U.S. will be released.
"Last Thursday's initial claims report reassured markets that U.S. labor demand remains OK," Colas said, so Powell can "lean into a confident message about the American economy."
The U.S. stock market was rising Monday afternoon, with the S&P 500, the Dow Jones Industrial Average DJIA and the technology-heavy Nasdaq Composite COMP each climbing around 0.6%, according to FactSet data, at last check. The market's increase brought the S&P 500's year-to-date gain to around 17%.
