Wealth Management — March 29, 2023
- The S&P 500 Index rose 1.4% Wednesday to 4,027.88 as 92% of the index's constituents ended the day higher. With the gain, the index is now up 4.9% year to date.
- All 11 S&P 500 sectors improved on the day, as Real Estate (+2.3%) and IT (+2.1%) outperformed while Consumer Staples (+0.5%) and Health Care lagged (+0.2%).
- Today, the Federal Reserve's vice chair for supervision, Michael Barr, testified before the House Financial Services Committee on the events and activities that followed the recent regional bank liquidity crisis. During the meeting on "The Federal Regulators' Response to Recent Bank Failures," officials spoke of the need for additional oversight as well as interest in proposals for congressional action to allow for higher deposit insurance caps, beyond $250,000.
- Strength in mega-cap technology stocks followed guidance from one management team on improved auto and industrial business, and despite another team's quarter-end report of continued margin degradation and the need to take a charge for an inventory write-down.
- By the 4pm equity market close, the US 10-year Treasury yield remained at 3.57%. Gold fell 0.5% to $1,963 per ounce, while WTI oil declined 0.4% to $72.90 per barrel.
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.