Investor spotlight: rising interest rates and earnings outlook drive market sentiment in different directions

Rising interest rates, the earnings outlook, and financial stability risks are driving market sentiment in different directions. In this week’s edition of Investor Spotlight, we look at the different themes driving local and US equities.

Investors weigh central bank rate rises

Investors were hit with several rate raises last week. The US Federal Reserve, European Central Bank, and Reserve Bank of Australia each increased their key interest rates by 25 basis points as the global fight against inflation continues.

As always, investors continue to look towards the horizon to gauge where policy could go from central bankers. Rates markets are pointing to an all but certain pause from the US Federal Reserve after its latest rate increase took the Federal Funds Rate to 5.00 - 5.25%.

Although acknowledging the possibility of a pause, Fed Chairperson Jerome Powell pushed back on the notion of rate cuts this year and next, suggesting he expects inflation to come down slowly. Interest rate markets indicate a better than 50% chance of at least three 25 basis point hikes from the Fed by the end of the year.

While US investors struggled to price in the impact of the latest Fed decision and outlook, the reaction of ASX investors to the RBA’s surprise rate hike was clear.

Stocks tumbled after the central lifted rates by 25 basis points to take the cash rate to 3.85% and a fresh 11-year high. The ASX 200 fell by more than 2% in the space of two sessions, with the RBA’s hawkish rhetoric prompting traders to price in a high chance of one more hike.

Market participants look ahead to CPI data out of the US this week for clues about the possible trajectory of US interest rates. Economists forecast a lift in monthly inflation, while the annual figure is likely to hint at sticky price pressures in the US economy.

The consensus forecast is for a 5.5% rise in inflation over the 12 months to April, backing up from a 5.6% rise in the month prior.

US earnings season points to resilient profits

Corporate earnings have proven a tailwind to investors recently, as profit growth for the first quarter exceeds analyst estimates. Total blended EPS growth is -2.2% for S&P500 companies, far exceeding the 6.7% contraction analyst had expected going into the earnings season.

It has been the cyclical areas of the market that have shown the most resilience. According to FactSet, consumer discretionary, industrials, energy, and financials are the best-performing sectors in the market, with consumer discretionary companies likely to post EPS growth of more than 50%.

Three stocks to watch

• Apple

Apple's results were the highlight last week and proved to be the latest set of quarterlies from the tech sector to exceed expectations.

Year-over-year profit growth declined by less than expected, with the company posting EPS of $1.52 against estimates of $1.44. Revenues were also stronger than forecast at $94.84 billion, with margins higher than expected. The solid topline results were driven by very strong iPhone sales, which offset weakness in Mac, iPad, and services revenue.

Apple shares climbed 3% last week off the back of its results. Price is now pushing to the top of its ascending wedge pattern with technical resistance around $170-$180 per share. A break of that level would be a very bullish signal and potentially point to further upside for the stock. Meanwhile, support appears to be around the $160 level.

Apple weekly chart

• Disney

Looking to the week ahead, a swathe of companies are set to report, although fewer mega-cap names are set to hand down results. Walt Disney Co. may prove to be the highlight as investors look to assess the outlook for consumer spending, tourism, and the so-called “streaming wars”.

Analysts forecast Walt Disney’s earnings to fall to $0.93 for the quarter, with revenue rising to $21.8 billion. Earnings growth is expected to recover in the year ahead, with the technicals pointing to a stock that may be bottoming and carving out a range between $90 and $120 per share.

Disney weekly chart

US regional banks teeter as systemic risks re-emerge

• PacWest Bancorp

Financial stability risks are still plaguing US investors as several regional banks teeter on the brink of collapse.

PacWest Bancorp, Zions, and Western Alliance are at the forefront of concerns, with the first of the three precipitating the broader sell-off in regional banks following a report it was preparing a distressed sale.

The risks in regional banks have been sparked by flighty deposits as banks fail to raise deposit rates, along with growing concerns about asset write-downs following several years of aggressive loan growth.

PacWest’s management looked to allay concerns about a run on the institution last week, suggesting it had, in fact, increased deposits since the beginning of March, aiding a surge in regional bank stocks.

The prospect of further bank failures remains elevated, however, as weaker economic growth and higher interest rates conspire to weaken credit growth. Issues with retaining deposits are likely to persist, too, as smaller regional banks struggle to compete with their safer, larger counterparts, along with higher-yielding money market funds.

PacWest Bancorp weekly chart