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Recession Fears Mount After Weak Manufacturing Data

Monday, May 16, 2022 | Thomas Hughes
Recession Fears Mount After Weak Manufacturing Data

No Reprieve For Tech Stocks 

The NASDAQ Composite (NYSEARCA: QQQ) is down more than 25% from its recent high and will probably head lower. Investors looking for a rebound are urged to caution in light of expected earnings and economic reports due out this week. While the bulk of Big Tech has already reported earnings we are expecting news from at least two blue-chip networking companies and what they have to say will move the market. Networking is the very foundation of technology, without it, there is no Internet, so any indications of slowing in this sub-sector will have far-reaching implications and there are already indications of slowing among tech companies. 

At the sector level, the techs (NYSEARCA: XLK) are outperforming their consensus estimates for Q1 but guidance for the current quarter and the full year is weak and weakening. The consensus for Q2 earnings growth in the Information Technology sector is only 1.6% and that is down from 4.2% at the start of the quarter. Growth in the Communications Services sector will be non-existent, the analysts have revised their estimates sharply lower and are expecting a -6.1% contraction versus the 0.2% increase predicted at the end of March. The takeaway here is the earnings outlook for tech is in decline and will most likely worsen before it gets better. As for the broader NASDAQ Composite and the S&P 500 (NYSEARCA: SPY)? The outlook for earnings growth is trending lower for those market indices as well. 


The Empire State Manufacturing Index Is Trending Lower 

The Empire State Manufacturing Index came in well below consensus at -11.6% versus the 16.5% advance it was expected to make. The decline is driven by decreases in New Orders and Shipments which both fell to their lowest levels since the pandemic began. Employment levels increased modestly, however, but we aren’t reading too much into that. Employment can be a lagging indicator, especially at economic peaks, and we already know labor costs are cutting into productivity, margin, and profits. To be fair, the index is choppy and could bounce back next month but has been trending lower since November 2021. Without a change in the economic fundamentals, we don’t see that trend ending. 

There are other data points due out this week that could move the market as well. The most important will be the Retail Sales figures on Tuesday and we expect them to be very weak. The analysts are expecting sales to advance on a month-to-month basis but to a tepid 1.1% which is far below the pace of inflation. With the core CPI up 6.2% from last year and the headline up 8.3%, retail sales continue to decline in volume while prices make up the difference. The longer this situation continues the more Americans will get priced out of items and services they would otherwise afford and that will increase the odds of a recession. 

The Technical Outlook: Beware Of A Rebound In The QQQ

The NASDAQ Composite has hit a new low and one well below the Q1 2022 support level of 12,750. The index is set up for a rebound at this time but it is not one we are willing to buy. The market is overextended and ready for a relief rally but resistance at the 12,750 will likely keep the market in check and that is assuming good reports from Cisco and Palo Alto Networks. If the reports are not good, and/or if the data isn’t compelling, the NASDAQ Composite and the QQQ will most likely retest the recent lows of 11,100 ($285 on the QQQ) and may even move lower

Recession Fears Mount After Weak Manufacturing Data

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