Wealth Management — February 3, 2023
What Happened in the Markets?
- The S&P 500 declined 1.0% Friday to close at 4,136.41. The index is now up 7.7% year-to-date.
- All 11 S&P 500 sectors fell on the day. Financials (-0.1%) and Energy (-0.2%) outperformed while Communication Services (-2.2%) and Consumer Discretionary (-3.1%) lagged the index.
- After three consecutive sessions of 1%+ gains, equity markets turned lower on Friday. A significantly better-than-expected January jobs report caused bond yields to jump and equities to fall as markets priced the potential for the Federal Reserve to become more hawkish. While signs that inflation is easing are becoming apparent, the jobs market remains very tight.
- Next week, fourth quarter earnings season continues with 10% of S&P 500 market cap scheduled to report results.
- After the 4 pm equity market close, WTI oil fell over 3% to $73 per barrel. The 10-year Treasury yield increased to 3.53% while gold fell 2.5% to $1,865 per ounce.
S&P 500 Price vs 50, 100, 200 Daily Moving Averages
- 4Q22 Earnings: As of market close, 250 S&P 500 companies reported fourth quarter results with 70% of them beating earnings expectations. In aggregate, for the companies that reported, earnings surprised by 1.5% while sales surprised by 1.0%, according to Bloomberg. For the S&P 500, bottom-up, blended 4Q22 earnings growth is anticipated to be -2.7% y/y even as earnings from Energy and Industrials companies are growing 60.3% and 40.7% y/y, respectively, according to Refinitiv. Excluding Energy, fourth quarter earnings are expected to be down 7.0% y/y. During company 4Q22 earnings calls, investors will be monitoring the effect of inflation and the slowing economy on fourth quarter revenues and earnings, as well as on forward guidance. We believe investors have not yet priced in softening corporate earnings.
The Global Investment Committee’s Outlook
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.