The 1% Move Report

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






Wealth Management — February 7, 2023

Source: Bloomberg and Morgan Stanley Wealth Management Global Investment Office as of 2/7/2023.

What Happened in the Markets?

  • After another rollercoaster trading day, the S&P 500 Index closed 1.3% higher Tuesday to 4,164,00.
  • Eight of the 11 S&P 500 sectors gained as Energy (+3.1%), and Communication Services (+2.5%), outperformed while Consumer Staples (-0.4%) and Real Estate (-0.3%) lagged the index.
  • Fed Chair Powell spoke at The Economic Club of Washington, D.C., today and reiterated that disinflation has begun in the goods sector, but that it will take time for inflation to come down in the services sectors. While the FOMC "expect(s) 2023 to be a year of significant declines in inflation," it will not be until 2024 before inflation returns closer to the 2% goal. As a result, he continued to highlight the FOMC's guidance for ongoing increases in rates with the potential need for additional hikes should future employment reports remain strong. MS & Co.'s Ellen Zentner forecasts 25bp rate increases at both the March and May FOMC meetings to a peak rate to 5.00%-5.25%. The January CPI report will be released next Tuesday. 
  • Nearly 72% of the S&P 500's market cap has reported 4Q22 earnings and, in general, company management teams have provided guidance for lower revenues, margins, and earnings as higher inflationary costs and the economic slowdown are expected to lead to lighter business activity. Many corporate executives have been highlighting cost reduction program efforts with goals of providing margin support as revenues decelerate.
  • WTI oil rose 4.3% as investors considered improved demand from China and supply constraints in Turkey.

Looking Ahead

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

Source: Bloomberg and Morgan Stanley Wealth Management Global Investment Office. Data as of February 7, 2023.
  • 4Q22 Earnings: As of market close, 274 S&P 500 companies reported fourth quarter results with 69% of them beating earnings expectations. In aggregate, for the companies that reported, earnings surprised to the upside 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. We believe investors have not yet priced in softening corporate earnings. 

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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