The 1% Move Report

Wealth Management — June 15, 2023

• The S&P 500 Index rose 1.2% Thursday to end the day at 4,425.84 having gained 15.3% thus far in 2023. 
• All 11 S&P 500 sectors were higher on the day, as Health Care (+1.6%), Communication Services (+1.5%), Industrials (+1.5%), Information Technology (+1.3%) outperformed the S&P 500 Index. Financials (+1.2%), Utilities (+1.1%), Energy (+1.0%), Consumer Staples (+0.9%), Materials (+0.9%), Consumer Discretionary (+0.7%), and Real Estate (+0.3%) underperformed. 
• By the 4:00 p.m. equity market close, the US 10-year Treasury yield decreased 7 bp to 3.72%; WTI crude oil prices increased 3.3% to $70.52 per barrel; and gold increased 0.8% to 1,957.99. 
• US equities moved higher today, pushing towards a fifth straight week of gains for the first time since November 2021.  
• Following a two-day meeting, the Fed announced a pause in interest rate hikes yesterday, leaving rates at 5.00%–5.25%. Investor expectations are building around a soft-landing scenario, that depicts a more modest rise in unemployment than previously expected.
• In the wake of softer economic data, Chinese policymakers appear to be weighing additional policy stimulus measures.
• Headline retail sales came in stronger than expected (0.3% vs -0.2%) today, along with the US Empire State Manufacturing Survey (6.6 vs. -15.1).
• Both initial jobless claims (262K vs. 245K) and continuing claims (1,775K vs. 1,768K) came in higher than expected, pointing to potentially softening labor market conditions.

• 1Q23 Earnings - Analysts' expectations for the S&P 500 Index's 1Q23 share-weighted earnings growth show a deterioration of -3.06% year-over-year (y/y) on 4.46% y/y revenue growth. This includes estimates for earnings declines in six sectors, and revenue declines in three sectors. The most significant declines in earnings were expected in the Materials (-25.0% y/y), Utilities (-20.8% y/y), Health Care (-16.5% y/y), Information Technology (-9.3% y/y), and Communication Services (-10.3% y/y) sectors, according to Bloomberg. With 99.9% of the S&P 500's market cap reported thus far, 78% announced earnings ahead of analysts' expectations. In aggregate, for the companies that reported 1Q23, sales and earnings are higher than analysts' expectations by 2.5% and 6.4%, respectively, with the largest earnings surprises in the Consumer Discretionary, Materials, and Industrials sectors. During company 1Q23 earnings calls, investors were closely monitoring forward guidance for pricing and volumes as well as for vulnerability of margins and earnings due to the current economic uncertainty, elevated inflation, volatile rate environment, tightening financial conditions, and slowing growth. While consumer spending has been resilient, management teams continue to balance pricing power and cost reductions to support margins. Nonetheless, we believe rising rates and slowing growth will lead to further deterioration in revenues, margins, and earnings.

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. The GIC has been concerned for the better part of a year that US indexes are increasingly priced for perfection, with equity risk premiums much too slim given plentiful risks. With global portfolios materially overweight US stocks as well, related risks are amplified, and vulnerability to a momentum reversal is profound. These comments refer to the GIC's Tactical recommendations. The GIC also provides guidance on the seven-year, Strategic horizon, with accompanying asset allocation recommendations that reflect the longer-term opportunity set. Long-term investors are well served reconciling portfolios to these extremes and seeking opportunities for diversification. Consider active management, which is increasingly necessary to contend with the concentration risk of passive indexes. We see opportunities for long-term investors in small-cap, value and cyclical stocks, while tactical rebalancing would favor emerging markets over the next six to 12 months. Consider focusing cash on income opportunities in both stocks and bonds.

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 $185 for 2023E earnings, well below current consensus levels. Their 2023E S&P 500 base case provides a target of 4,200, based on 2024E earnings of $228. This scenario assumes that nominal top-line growth slows to the low single digits and that margins contract. Their 2023E bear case of 3,700 considers a severe earnings recession, margin pressure and a contraction of EPS growth. Their 2023E bull case of 4,700 corresponds to a mid-single-digit top-line growth rate and limited margin compression. This bull case forecast embeds an estimate of 18.6x MS & Co.'s forward 2024E earnings of $236. 

Please find more tactical commentary from the GIC in the GIC Tactical Asset Allocation Changes.

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.