The 1% Move Report

Wealth Management — June 27, 2023

• The S&P 500 Index rose 1.1% Tuesday to end the day at 4,378.41 having gained 14.0% thus far in 2023. 
• 10 out of 11 S&P 500 sectors were higher on the day, as Consumer Discretionary (+2.1%), Information Technology (+2.0%), Materials (+1.4%), and Industrials (+1.3%) outperformed the S&P 500 Index. Communication Services (+1.1%), Real Estate (+1.1%), Financials (+0.6%), Consumer Staples (+0.3%), Energy (+0.2%), Utilities (+0.0%), and Health Care (-0.2%) underperformed.
• By the 4:00 p.m. equity market close, the US 10-year Treasury yield increased 4 bp to 3.76%; WTI crude oil prices decreased 2.3% to $67.78 per barrel; and gold decreased 0.5% to 1,913.48. 
• US equities moved higher today, as economic data on housing, durable goods orders, and consumer confidence appeared more resilient than expected.
• May’s new home sales came in much stronger than expected, at 12.2% month-over-month, compared to the consensus estimated -1.2%, setting a 15-month high.
• Durable goods orders beat expectations for the third consecutive month, eclipsing expectations by 2.6% (-0.9% expected vs. 1.7% actual).
• June consumer confidence reached its highest level since January 2022 at 109.7, surpassing expectations of 104.0.

• 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 2023, given their base-case expectations of $185 for 2023E earnings and S&P target of 3,900, well below current consensus levels. Their June 2024E S&P 500 base case provides a target of 4,200, based on June 2024E earnings of $239. This scenario assumes the Fed keeps policy rates steady at 5.1% before cutting by 25bps starting in 1Q24. Their June 2024E bear case of 3,700 considers a more significant slowdown in credit growth, tighter financial conditions, and a sharp rise in unemployment. Their June 2024E bull case of 4,700 assumes that supply-side inflationary pressures cool down quickly and core services inflation is less sticky than expected. This bull case forecast embeds an estimate of 18.6x MS & Co.'s forward June 2024E earnings of $253.

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.