Stocks were deeply under pressure last week as anything tech related continues to be a massive dark cloud over this market. We saw drastic chop this week as Monday was met with selling. Tuesday we gapped up and erased most of Monday's losses -- only to sell off the rest of the day. Wednesday was met with oversold buying at support and Thursday found stocks once again erasing those gains as we closed the week at lows. Stocks have been very sensitive to the Fed's projections of how much they will raise interest rates throughout the rest of this year.
While interest rate chatter has been the belle of the ball the past few months, earnings season is ramping up this week and this will largely determine the direction of stocks in the near future. We can look at some data to get a better idea of what we're up against. In 2018-2019, the S&P earned around $40/share per quarter. In Q4 of 2021, the S&P 500 earned around $55/share per quarter. That's an increase of 37.5% in the earnings growth in that time. The S&P is up 36.8% from its year end 2019 close. Coincidence? Stop it. My thinking is that if earnings can hold $55/share per quarter through year end, then the large cap stocks will be OK. We may not see massive gains in the indexes if that's the case, but that information suggests the downside will be limited. The street is currently estimating $51.60 per share for the first quarter earnings. We need to see an average beat of 6.6% to hold the $55/share line. Since the typical beat rate is around 4-5%, that is a tall order, but at least we know what we're up against.
We've got the first big week of earnings season slated for this week. We have some more banks and transporters to kickoff Monday. Tuesday morning we have Halliburton and Johnson & Johnson as the bigger companies reporting, with Netflix after the close. We've got Tesla Wednesday along with some airlines. The rest of the week we'll see some energy and financial stocks cap off the first busy week.
We got an inflation reading of 8.5% percent in the March CPI, and while that is another 40 year high, the question is whether or not this number is peaking here. While the Fed's chatter is aimed at convincing investors they are serious about reducing inflation, it is not working all too well. Market's seem pretty convinced inflation has become pretty structural due to commodity constraints along with de-globalization, or they just flat out don't believe the Fed's commitment to their goal.
The current state of the market is all about understanding the sector rotation we've seen and sticking to buying the strongest ones. If you've spent most of your 2022 buying tech stocks, you're piling losses faster than the Lakers. Energy stocks have been in control this year and if you've put your focus there, you're likely experiencing tremendous success in a very difficult market. Times like this, I don't try to overthink it and be smarter than the market. Tech stocks have been getting punished week after week and there's no reason to think that will change this week. Energy stocks still have room to run to the upside and there's a plethora of oil & gas names setting up this week, as you'll see in the report below.
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