Wealth Management — April 28, 2022
What Happened in the Markets?
- The S&P 500 rallied 2.5% on Thursday to close at 4,288. The index is down 10% year to date. This was the largest one-day gain for the S&P 500 since March 9, 2022. The Nasdaq 100 gained 3.5% and the Russell 2000 rose 1.8%.
- Every S&P 500 sector was higher today, with Information Technology (+4.0%) and Communication Services (+3.9%) outperforming the broad market while Utilities (+1.1%) and Industrials (+1.1%) lagged.
- 1Q22 earnings reports have been the focus this week, with better than expected results in mega-cap technology. Meanwhile, GDP disappointed this morning as net trade and inventories hit headline numbers more than anticipated.
- In overseas markets: inflation was reported higher than expected in Germany; Russia cut off natural gas supplies to Poland and Bulgaria in response to European sanctions; Bank of Japan doubled down on bond buying, prompting the Yen to weaken further vs the US dollar.
- As of the 4pm equity market close, the 10-year Treasury yield was range-bound, as markets await a potential 50 basis-point hike at the FOMC meeting next week (May 3-4). Additionally, WTI oil was near $105 per barrel and the US Dollar Index continues to strengthen as financial conditions tighten.
What to Watch Going Forward
- Q1 Earnings: First quarter earnings season is nearly half over as 48% of the S&P 500 constituents reported results thus far (238 companies) and 13 more are expected tomorrow. By the end of next week, 167 additional releases are anticipated. For the S&P 500, 81% of the companies that reported beat earnings expectations. For 1Q22, blended earnings growth for all of the S&P 500 companies, including those that have not reported, is running at 9.4% year-over-year (+3.9% y/y) for the companies that reported), according to Refinitiv. Strong earnings growth is expected from the Energy sector and a deceleration in earnings growth from the Financials, Communication Services, and Consumer Discretionary sectors. During 1Q22 earnings calls, investors are closely monitoring forward guidance as well as the vulnerability of margins, earnings and valuations due to headwinds from higher input costs and deteriorating demand.
- Monetary Policy: After the latest bout of hawkish global central bank commentary from Federal Reserve Chairman Jerome Powell and many ECB officials last week, markets will be keenly focused on next week's FOMC meeting (May 3-4). Particular attention will be given to comments related to the Fed's balance sheet, with a potential formal announcement on when balance sheet reduction could start. Currently, futures markets are pricing a 100% chance of a 50 basis-point hike for both the May and June FOMC meetings. MS & Co. Chief US Economist Ellen Zentner also expects two 50-basis-point hikes at both the May and June meetings.
- Economic Calendar: Employment Cost Index, Personal Income and Spending, U of Michigan Consumer Sentiment (4/29).
The Global Investment Committee’s Outlook
With the Fed poised to respond to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution in the indices remains intact. Our base case year-end 2022 target of 4,400 for the S&P 500 and our bull case of 5,000 corresponds to a view that rising rates and higher policy uncertainty demands lower price/earnings ratios and our forecast embeds an estimate of 18x forward earnings, despite a forecast for earnings growth of 10%-12% in 2022. With earnings revisions moving lower off the prior peak, investors should focus on risk management through quality factor exposure, defensiveness with regard to interest rate sensitivity, and attention to stock-specific valuations. We are moving to a position of maximum diversification by sector and market cap, with interesting ideas being found in Energy, Industrials, Materials, Health Care, Consumer Services, Financials, Utilities and Staples. While the US recovery matures, we see opportunities outside the US as relatively more attractive, especially given less expensive valuations and exposure to economic cyclicality. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital in a rising rate and higher inflation environment. This requires a diversified and active exposure, with our preference for core investment grade, preferreds, leveraged loans, and asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.
Market data provided by Bloomberg.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.
Important note regarding economic sanctions. This event may involve the discussion of country/ies which are generally the subject of selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries or multi-national bodies. The content of this presentation is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or may become subject to sanctions. Any references in this presentation to entities or instruments that may be covered by such sanctions should not be read as recommending or advising on any investment activities involving such entities or instruments. You are solely responsible for ensuring that your investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.