Based on the initial market action of 2023, it appears that investors continue staying with the big tech firms, placing some bets on value stocks, while feasting on bonds of all kinds to capture healthy yields and maintaining some hope that the elusive soft economic landing remains possible.
Markets have revealed some clear preferences in the early going, some of which have simply carried over from 2022. These include the continued unwinding of the massive valuation premium and over-optimistic investor sentiment in the Nasdaq giants.
The stock market faces its next big test this week with the kick-off of a corporate earnings season that is expected to be dominated by worries about inflation and the health of the economy.
Analysts expect companies in the S&P 500 to report their first year-over-year decline in quarterly earnings since the height of the Covid-19 pandemic in 2020. Fourth-quarter profits are projected to have dropped 4.1%, a sharp reversal from the more than 31% growth logged a year earlier.
Companies have been battling a host of challenges, including persistently elevated costs, rising interest rates and a once-in-a-generation surge in the dollar. And while analysts have been trimming their earnings expectations, investors are looking to this next round of reports for insights into the resilience of corporate profits and the outlook for stocks.
Under this background, staying with those big names with healthier cash flows become the most investment principles for now, such as Apple, Microsoft, etc.
Apple’s weakening demand and production issues right now is evident from the sharp decline in stock value. However, taking into account the value that the company has returned to shareholders in the past years, even through market downcycles, these headwinds seem to be mere hiccups in the company’s long-term journey.
To some extent, its near-term production headwinds create a long-term buying opportunity, and its massive installed user base, increasing ecosystem, and growing Services revenue will continue to drive accelerating Business Performance trends, and greater shareholder value creation.
Moreover, strong balance sheet and cash flow generating capabilities should enable Apple to continue to invest in growth-driving initiatives and enhance shareholder returns through share repurchases and dividend hikes.
Fullerton Markets Research Team
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