Stocks shrug off deflation fears as fewer companies point to ‘recession’.

Stocks shrug off deflation fears as fewer companies point to ‘recession’.

Written by Christine Edzelis

BlackRock expects more market volatility between hopes for a “soft landing” and fears about rising interest rates and a recession.

The number of companies citing a recession in their quarterly earnings reports is declining, as stocks continue their dramatic three-week rally and investors weigh the chances of a soft landing for the US economy.

11 percent of companies in the S&P 500 referenced “recession” during their conference calls about third-quarter earnings results, far below the peaks last year and in 2020 of which each were more than 40%, according to a dataTrek research note mailed to Email on Monday. Citing FactSet data.

However, company management’s concerns about the impending economic downturn remain high when looking at the past decade, Nicholas Colas, co-founder of DataTrek, said in the note. He said references to recession during third-quarter earnings calls remained “at the upper end of the 2013-2019 range” with 3%-11% of companies citing the word.

“Stocks have shrugged off recession fears, but remain higher in many companies,” Colas said. “This is a recipe for further cost cutting, and we expect unemployment to increase in the coming months as a result.”

At the sector level, financials and industrials have the highest number of S&P 500 companies citing “recession” in third-quarter earnings calls, while real estate has the highest percentage of companies doing so, according to a note from John Butters, From FactSet. Senior Earnings Analyst, on November 17.

Meanwhile, the Conference Board’s leading economic indicator continued to show signs of recession even as the US economy continued to grow amid a decline in the unemployment rate. Investors are closely monitoring inflation, which has eased this year after rising in 2022 to the highest level in decades, but remains above the Federal Reserve’s 2% target.

Soft landing hopes

The Federal Reserve has rushed to raise interest rates in an attempt to tame inflation, while at the same time trying to engineer a so-called soft landing for the US economy. That is, the central bank aimed to avoid triggering a recession through a series of interest rate hikes that began in early 2022.

As inflation eases, the Federal Reserve has kept its benchmark interest rate steady since it last raised it to a 22-year high in July.

“The problem: Inflation is falling because the rapid rate rise to combat it has pushed the US growth trend below pre-Covid levels,” BlackRock Investment Institute wrote in a market commentary note on Monday. “We believe more of the same is needed to keep inflation low as price pressures resume amid slowing labor force growth and geopolitical shocks.”

According to BlackRock, “Markets appear to be missing this bigger picture, and we see more volatility ahead as they oscillate between hopes for a ‘soft landing’ and fears about rising interest rates and a recession.”

More than half of the S&P 500 companies “continue to see inflationary pressures in their cost structures and are drawing that to the attention of Wall Street analysts and investors,” DataTrek’s Colas said, citing data from FactSet on “inflationary” signals during calls. Its profits. For the third quarter.

While the percentage of S&P 500 companies citing “inflation” fell to 55%, from a 2022 peak of 83%, this “is still well above pre-pandemic era readings” on the order of 18%. to 32%, Colas said on their earnings calls. .

“U.S. companies’ continued concern about important macroeconomic trends” based on mentions of “recession” and “inflation” in earnings calls is not “necessarily bad” for stocks, DataTrek notes.

“Managements know that the name of the game next year will be margin management, not mindless revenue maximization,” Colas wrote. “As long as the U.S. economy continues to grow next year, this should allow companies to meet or exceed Wall Street analysts’ earnings estimates over the next two quarters.”

US stocks were higher on Monday afternoon, with the Dow Jones Industrial Average (DJIA) up 0.5% while the S&P 500 SPX rose 0.7% and the Nasdaq Composite rose 1%, according to FactSet data, at last check.

The S&P 500 was on track to extend its big winning streak, having jumped 9.6% over the past three weeks in the biggest three-week percentage gain since June 2020, according to Dow Jones Market Data. The index is up more than 18% so far this year, based on Monday afternoon trading.

Read: Stock market soars toward 2023 high. Will holiday shoppers put it over the top?

-Christine Edzilis

This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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11-20-23 1430 EST

Copyright (c) 2023 Dow Jones & Company, Inc.

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