To The Moon

I'd like to thank Tiger for awarding the weekly top predictions for SPY again! Now that the March Madness is behind us, let us take stock of the last quarter and prepare for what lies ahead this coming week. Do note that the market is closed on Good Friday.

The benchmark S&P 500 posted a 7% gain for the first quarter, which ended on Friday, rebounding after a nearly 20% drop in 2022. The Nasdaq Composite's 16.8% first-quarter jump was its biggest quarterly rise since 2020.

Some investors say that performance could come under pressure if a widely expected recession hits. Wary investors say those gains leave stocks more vulnerable to an economic downturn, which may have been brought closer by tumult in the banking sector following this month’s collapse of Silicon Valley Bank. 

Many point to equity valuations, which remain elevated by historical standards, while arguing that corporate earnings may have a long way to fall in the event of a recession.

Stay calm and trade on 💪

This month’s banking sector turbulence again revved up concerns, as some analysts argued the stress on lenders could pressure the economy just as the Fed’s monetary policy tightening is starting to bite.

That’s pushed investors to take a second look at key metrics such as corporate earnings. While estimates for profits are already downbeat for the coming quarters, some believe they may fall further if there is a recession.

"Given the events of the past few weeks, we think ... equity markets are at greater risk of pricing in much lower estimates," Morgan Stanley (NYSE:MS) strategists said in a report earlier this week, noting that earnings estimates were 15-20% too high even "before the recent banking events."

Feeling FOMO already? 😉

S&P 500 earnings for the first quarter are estimated to have fallen 5% from the prior year, followed by an expected 3.9% drop in the second quarter, Refinitiv data shows. During recessions, however, earnings tumble at a 24% annual rate on average, according to Ned Davis Research.

Valuations for stocks overall are also high historically, with the S&P 500 trading at about 18 times forward earnings estimates compared to its long-term average P/E of 15.6 times, according to Refinitiv Datastream.

Which point are we at now?

Some investors say stocks may have priced in a recession during last year’s steep decline, which saw the S&P 500 fall by as much as 25.4% from its all-time high to when it reached its October nadir. U.S. companies will start reporting first-quarter results in the coming weeks.

Before that, investors are looking to next week's monthly payrolls report for a read on the strength of a labor market that has shown resiliency over the past year.

U.S. ECONOMIC DATA THIS WEEK:

*ISM MANUFACTURING PMI (MON.)

*JOLTS (TUES.)

*ADP PAYROLLS (WED.)

*ISM SERVICES PMI (WED.)

*JOBLESS CLAIMS (THURS.)

*GOOD FRIDAY - U.S. STOCKS CLOSED

*NONFARM PAYROLLS (FRI.)

*UNEMPLOYMENT RATE (FRI.)

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