We find ourselves investing in a grind-it-out, range-bound market. Investors are looking for the next big catalyst.

So far in 2023, climbing the proverbial wall of worry has been the major impetus for the market’s upward movement.

Driving another major leg, up or down, will be the Federal Reserve’s policy-making meeting May 2-3. Fed Chief Jerome Powell and his monetary mandarins are expected to hike interest rates by another 25 basis points. However, they might stand pat, which would likely spur a relief rally.

First-quarter 2023 earnings results are yet another fulcrum. This is a busy week for operating results, with Big Tech up at bat. The tech sector has outperformed year to date, rebounding from its dismal showing in 2022. We’ll know this week whether tech’s momentum can last.

Q1 report cards for the S&P 500 have been mixed so far, with a few pleasant surprises, e.g. the outperformance of the big banks. With 18% of S&P 500 companies reporting actual results, 76% have reported a positive earnings surprise, according to FactSet.

Five of the 11 S&P sectors are reporting year-over-year earnings growth, led by consumer discretionary and industrials. However, Q1 results as a whole have been underwhelming.

As of this writing, the blended year-over-year Q1 earnings decline for the S&P 500 is -6.2%. “Blended” combines actual reports with estimates. If -6.2% is the actual decline for the quarter, it will represent the largest earnings decline reported by the index since Q2 2020 (-31.6%).

Among the worst Q1 flops to date was electric vehicle maker Tesla (NSDQ: TSLA), which unveiled shrinking net profit margins even as mercurial CEO Elon Musk insists on slashing vehicle price tags.

But Tesla isn’t alone in its struggle with margins. The main culprits for declining profit margins across the board are inflation and supply chain woes.

The blended net profit margin for the S&P 500 for Q1 2023 is 11.2%, which is below the previous quarter’s net profit margin, below the year-ago net profit margin, and below the five-year average net profit margin (11.4%).

The following chart breaks down net profit margins by sector. As you can see, real estate, information technology, and financials are in the lead:

If you’re worried about market uncertainty, here’s some reassuring context. About six months ago, the S&P 500 fell below 3,600 (down 25% from its high), core consumer price index (CPI) inflation surged to a 40-year high at 6.6% year-over-year, and the 10-year Treasury yield jumped to 4.25%.

Since then, conditions have generally recovered, with the S&P 500 currently hovering above its 200-day moving average, and the core CPI in March falling to 5.0% (down from 6.0% in February). As of market close Tuesday, the 10-year Treasury yield had fallen to 3.40%.

The consensus of analysts still calls for the S&P 500 to end 2023 with a gain in the low double digits. That said, the main U.S. stock market indices closed sharply lower Tuesday as follows:

• DJIA: -1.02%
• S&P 500: -1.58%
• NASDAQ: -1.98%
• Russell 2000: -2.40%

Wall Street was rattled by the continuing woes of First Republic Bank (NYSE: FRC). The bank’s shares plunged nearly 50% on Tuesday, after the bank announced that deposits declined by 40% in the first quarter to $104.5 billion. Trading in FRC was briefly paused Tuesday afternoon. Shares have declined more than 93% year to date.

WATCH THIS VIDEO: Never Bet Against America

But here’s the good news: After the closing bell Tuesday, mega-cap tech bellwethers Alphabet (NSDQ: GOOGL) and Microsoft (NSDQ: MSFT) reported quarterly earnings that beat estimates on the top and bottom lines.

Alphabet’s earnings per share (EPS) came in at $1.17 versus estimates of $1.06. Revenue came in at $58 billion vs. the $56.9 billion estimate.

Microsoft’s EPS was $2.45 vs. $2.23 expected. Revenue was $52.9 billion vs. $51.1 billion expected.

After a year of aggressive hawkishness, the Fed is nearing the end of its rate tightening cycle. Inflation is elevated but cooling. What’s more, earnings projections are on track to improve and reach positive territory in the second half of the year.

The next big test? The personal consumption expenditures (PCE) price index reading scheduled for Friday. The latest PCE print is expected to further underscore deflationary trends, but if it doesn’t, markets probably will tumble.

Political risk is a factor as well. Congress is expected to vote this week on the debt ceiling. Both parties are still far apart. What transpires this week in the kindergarten-along-the-Potomac is anyone’s guess.

Hang tough. We’re still climbing that worry wall.

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John Persinos is the editorial director of Investing Daily.

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