Weekly review 27 February 2023: “Too good” economic data weighing on equity markets


Investors are living in challenging times with both good and bad economic news plaguing the equity markets. The earnings season is coming to a close in the USA. Earnings contracted moderately, as expected.

Weak economic development is usually bad news for companies’ earnings growth and also naturally has a negative impact on the equity markets. In today’s world, however, good economic development is maintaining high inflation and increasing the pressure on central banks to raise interest rates, which is reflected negatively in the equity markets. Whether good or bad news, the economic data does little in the way of lifting equity investors’ spirits. As a matter of fact, last week’s “too good” economic data caused the equity markets to come down.

Recent business confidence figures from both the USA and Europe continued to strengthen. Confidence strengthened on both sides of the Atlantic especially in the services sector, while development was softer in the industrials sector. The US combined confidence index was 50.2 (previous 46.8) and in Europe 52.3 (previous 50.3). When the figure is above 50, purchase managers expect activity to improve, and when it is below 50, they expect activity to decline.

The figures describing the behaviour and expectations of US consumers also strengthened. Personal spending grew by +1.8 per cent in January from the previous month, and the Personal Consumption Expenditures price figures rose by +5.4 per cent year on year, slightly more than expected. Michigan University’s consumer confidence index published on Friday also strengthened somewhat. What is interesting about the index figures is that the component describing the current situation of consumers weakened slightly while expectations of the future improved.

Business confidence indices that were clearly above expectations in the USA and Europe and US figures measuring personal spending increased expectations of the monetary policy tightening for longer than expected, which raised the interest rate level. In recent weeks, central bankers have advocated the tightening of monetary policy. Last weekend, Christine Lagarde, the President of the European Central Bank, warned that the ECB would probably raise the key interest rate by 0.5 percentage points, i.e. two increments at a time, in its March meeting.

This week, the publication of the latest US ISM manufacturing index figures (expectation 48.0; previous 47.4) on Wednesday and preliminary data on February inflation on Thursday will provide us with more information about the state of the economy. The markets expect headline inflation to have moderated to +8.2 per cent from the previous 8.6 per cent. Core inflation, i.e. inflation less energy and food, is expected to have remained at +5.3 year on year.

The earnings season is coming to a close in the USA

In the USA, almost all companies have reported their earnings for the final quarter of last year. Earnings have contracted moderately, by around -3 per cent, as expected. Net sales growth has been only +6 per cent, which means that in real terms, average net sales have contracted, as inflation in Q4 was 6.5–8.0 per cent.

The earnings performance of industrial companies has been largely positive. The earnings growth of the whole sector is driven, however, by the defence industry and transport and logistics. The assumed plight of consumers has had little impact on the performance of consumer product and service companies. Energy companies have continued to post high growth figures, but their earnings growth is moderating, however. Earnings performance has been weak for technology companies and companies in the materials and media sectors.

In Europe, the earnings season is still ongoing, with around 60% of companies having reported their earnings. The earnings season has been better than expected. Earnings have grown by +9 per cent and net sales by +13 per cent on average. Real growth has been modest, however, as inflation was around ten per cent.

Earnings performance in the materials sector is weighed down by the shrinking of steel industry companies’ earnings due to high electricity prices and low steel prices. The strong earnings of car manufacturers have driven up the figures in the consumer sector. Energy companies have continued to post large growth figures also in Europe, but their earnings growth is moderating even on this side of the Atlantic, however.


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