The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.

 

 

 

 

 

Wealth Management — April 13, 2023

Source: Bloomberg and Morgan Stanley Wealth Management Global Investment Office as of 4/13/2023.

What Happened in the Markets?

  • The S&P 500 Index rose 1.3% Thursday to end the day at 4,146.32, 8.0% higher year to date. 
  • Ten of the 11 S&P 500 sectors improved on the day, as Communication Services (+2.3%), and Consumer Discretionary (+2.3%) outperformed, while Utilities (+0.0%) and Real Estate lagged (-0.4%). 
  • By the 4pm equity market close, the US 10-year Treasury yield rose to 3.45%. Gold increased 1.3% to $2,040.30 per ounce, while WTI oil declined 1.1% to $82.31 per barrel. 
  • Today's economic data releases included higher-than-expected jobless claims and a cooler Producer Price Index (PPI) inflation report of +2.7% y/y. This inflation report was lower than the consensus forecast of a 3.0% y/y increase. 
  • As elevated inflation cools and the economy slows, equity markets seem to look toward the possibility of a soft landing. MS & Co.'s Ellen Zentner believes another 25bp hike will be announced at the May FOMC meeting while consensus looks to a 74% chance of a 25bp Fed hike in May.

S&P 500 Price vs. 50, 100, 200 Daily Moving Averages

Source: Bloomberg and Morgan Stanley Wealth Management GIO. Data as of April 13, 2023.

Looking Ahead

  • 1Q23 Earnings - With the official start to 1Q23 earnings season this week, we hope to hear guidance from many corporate management teams. Within the S&P 500 Index, management teams from five companies in the Financials sector, and one Health Care company will report earnings tomorrow. For the S&P 500, current expectations are that the first quarter will bring revenue growth of 1.8% y/y alongside share-weighted earnings deceleration of 8.0% y/y given a negative earnings growth rate in six of the 11 sectors. The most significant declines in earnings are expected in the Materials (-35.2% y/y), Health Care (-21.0% y/y), Communication Services (-15.7% y/y), and Information Technology (-14.8%) sectors. During company 1Q23 earnings calls, investors will be closely monitoring forward guidance for pricing and volumes as well as vulnerability of margins and earnings due to the current economic uncertainty, elevated inflation, volatile rate environment, tightening financial conditions, and slowing growth. Despite expectations for lower rates, plans for cost reductions across businesses, and resilient consumer spending, the likelihood of negative operating leverage remains as companies navigate pricing power. We believe earnings forecasts remain too high and equities are not pricing in additional pressures from a soft landing or a recession, which could lead to further earnings cuts. We recommend managing volatility through a combination of maximum diversification and active risk management.

The Global Investment Committee’s Outlook

Source: Morgan Stanley Wealth Management Global Investment Office as of December 8, 2022.

With the Fed responding to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution remains intact. Corporate earnings revisions moved lower over the course of 2022, suggesting downside to forward earnings growth. We recommend investors focus on risk management through quality cash flows, defensiveness, and attention to stock-specific valuations. We suggest rebalancing portfolios and tax-loss harvesting during bear market rallies. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital, given the potential for higher yields amid ongoing inflation. This requires diversified and active exposure, with our preference for core investment grade fixed income and dividend-paying stocks. Consider revisiting positioning in long-duration/growth equities, where there may not be adequate compensation for the risks of higher real rates, falling operating leverage and the strong US dollar. 

For US equities, the MS & Co. US Equity Strategy team sees the potential for further equity downside in the early part of 2023, given their base-case expectations of $195 for 2023E earnings, well below current consensus levels. Their 2023E S&P 500 base case provides a target of 3,900, based on 2024E earnings of $241. This scenario assumes that nominal top-line growth slows to the low single digits and that margins contract. Their 2023E bear case of 3,500 considers a severe earnings recession, margin pressure and a contraction of EPS growth. Their 2023E bull case of 4,200 corresponds to a mid-single-digit top-line growth rate and limited margin compression. This bull case forecast embeds an estimate of 16.7x MS & Co.'s forward 2024E earnings of $251. 

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.

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