February starts with a jolt as Amazon and Apple report on the 1st followed the next day by January's jobs report. Retail earnings later in the month also could help set the tone.
February is front-loaded as Apple, Amazon kick off month followed by jobs data
Retail earnings later in February could provide insight into consumer sentiment
Credit conditions get an update February 5 when the Fed releases quarterly bankers’ survey
Many people don’t realize it’s a leap year until February 29 dawns, as it will next month. That gives companies a chance to pack in one more day of revenue than normal and can also help pad economic data versus the previous year.
Aside from that little nugget, February means earnings season rolls on toward reports from major retailers and artificial intelligence (AI) giant Nvidia (NVDA) later in the month after beginning with an opening crescendo from Apple (AAPL) and Amazon (AMZN). It’s also when investors hope to get a clearer sense of U.S. credit conditions nearly a year after last spring’s banking industry issues.
Multiple sectors rallied to start the year, only to return to their old ways by mid-January with only info tech and communication services leading the way up.
One thing to watch in February and beyond is whether investors circle back to small caps and cyclical sectors like financials and industrials, perhaps suggesting optimism about the economy in general and not just a few heavyweight tech names.
January ends with the latest Federal Reserve decision, which is widely expected to be another pause, extending the current rate freeze to six months since the last hike in late July. Investors appeared to grow more comfortable by late January with the idea that the Fed might not lower rates in March. By late January, the CME FedWatch tool pegged odds of a March rate cut near 50%, down from nearly 80% earlier in the month.
Solid economic data including retail sales, home sales, and consumer sentiment all point toward the Fed sticking with its projections of a handful of rate cuts this year, perhaps starting in May or June. That could come into clearer focus in February with the month’s menu of updated inflation and retail sales metrics.
February is somewhat front-loaded, with its first week featuring earnings from Apple and Amazon along with the January Nonfarm Payrolls report. Because Apple and Amazon come the first day of the month, we’ll start there.
Apple shares started the year on a downturn, falling nearly 10% from December highs amid analyst downgrades, a report from The New York Times that the Justice Department could file an antitrust suit against the iPhone manufacturer, and weak revenue tidings from major supplier Foxconn Technology that played into concern about demand for AAPL products. The company also lost its status as first in market capitalization when Microsoft (MSFT) inched past it for the title.
A late-December cover story in Barron’s added to the gloom, with a headline saying AAPL needs new growth to “justify” its stock price. The article also noted that AAPL’s revenue has declined year over year the past four quarters and said that trend will likely continue when it reports in February.
Things improved for Apple shareholders later in January when Bank of America (BAC) upgraded the stock, but concerns remain after Taiwan Semiconductor (TSM), the largest maker of semiconductors, said it anticipates weak demand for cell phone chips early this year.
Amazon, meanwhile, recently announced layoffs in its Buy with Prime unit. As Amazon reports February 1, focus will likely turn to the cloud where Amazon Web Services (AWS) cloud revenue rose 12.3% year over year in Q3. That growth rate is down from a few years ago, but because Amazon’s cloud revenue far surpasses competitors, it represented a significant bump in the company’s most profitable business. Advertising revenue and e-commerce are other areas to watch when Amazon reports.
Earnings season got off to a mixed start in late January. Through the week ending January 26, 25% of S&P 500 (SPX) stocks have reported Q4 earnings and 69% beat analysts’ average earnings-per-share (EPS) estimate, according to research firm FactSet. About 68% have beaten revenue estimates. The blended year-over-year EPS decline (including companies already reporting and estimates for those yet to report) is negative 1.4%, FactSet noted. The percentage by which companies have beaten average EPS estimates also was below average through last week.
That was an early read mostly based on financials and industrials, however, and earnings season kicks into higher gear the last week of January and into February as big tech and retail dominate.
The U.S. economy appeared to slow in Q4, and that included jobs growth. Though December’s U.S. Nonfarm Payrolls report showed surprisingly resilient job gains of 216,000 and unemployment remained low at 3.7%, there were downward revisions to the October and November data.
That continued a trend toward negative revisions that could possibly happen again when the January jobs data bow. Labor force participation, which had been rising since the pandemic ended, fell to 62.5% from the previous 62.8%, a relatively sharp decline for the category and a negative signal for the economy. It could imply a growing number of people are seeking work but are unable to find jobs. That’s a metric worth watching in the January report.
One sometimes overlooked aspect of labor market health is borrowing conditions. Small businesses employ roughly half of all U.S. workers, and there were concerns last year these companies could face a “credit crunch” amid rising interest rates and after several banks failed. That hasn’t materialized and might help explain why companies are keeping layoffs mostly at bay.
“Credit markets are off to a hot start with investment-grade corporate bond issuance expected to reach $160 billion for the month,” said Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. “Issuers are taking advantage of the drop in Treasury yields and the drop in spreads, with average borrowing rates near their lowest levels since last May.”
On February 5, investors get a closer-up view at the credit market when the Fed releases its Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). It’ll be interesting to see if the report shows more inclination toward tighter credit and falling loan demand, as the October survey reported. Any deviation from that could indicate a looser loan environment that bodes well for the economy.
The Fed’s rate decision and comments on January 31 are likely to have an impact on February’s markets after major U.S. indexes hit record highs in late January for the first time in two years. Tech has led the way, with semiconductors especially strong amid AI enthusiasm.
Nvidia’s expected earnings in late February are likely to dominate proceedings as investors monitor demand for AI chips. Nvidia, and to some extent Advanced Micro Devices (AMD), dominated that category in 2023, leading to meteoric share gains.
Still, it wouldn’t be right to leave out many of the other firms reporting in February, especially as retail earnings season picks up by mid-month. Several retailers recently shared upbeat news about their holiday seasons, but there’s anecdotal evidence of many companies cutting prices and offering coupons to lure shoppers. Quarterly reports from Walmart (WMT), Target (TGT), Lowe’s (LOW), Home Depot (HD), and others expected in February could help tell a fuller tale about where the consumer stands.
How consumers fare could depend in the short term on borrowing costs, and Treasury yields will likely be closely monitored throughout February as the March Fed meeting approaches. The benchmark 10-year Treasury yield (TNX) fell below 3.8% in late December but climbed to near 4.15% by mid-January, and mortgage rates climbed as well. However, homebuying demand seems to be on the upswing, according to the Mortgage Bankers Association (MBA), and remember, potential homebuyers have that extra day in February to visit open houses.
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