The 1% Move Report

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

 

 

 

 

 

Wealth Management — May 17, 2023

Source: Bloomberg and Morgan Stanley Wealth Management Global Investment Office as of 5/17/2023.

What Happened in the Markets?

  • The S&P 500 Index rose 1.2% Wednesday to end the day at 4,158.77, having gained 8.3% thus far in 2023. 
  • Nine of the 11 S&P 500 sectors were higher on the day, as Energy (+2.1%), Consumer Discretionary (+2.0%), Financials (+2.0%), Industrials (+1.7%), Real Estate (+1.3%), and IT (+1.3%) outperformed the S&P 500 Index. Materials (+0.7%), Health Care (+0.1%), Consumer Staples (-0.1%) and Utilities (-0.4%) underperformed. 
  • By the 4:00 p.m. equity market close, the US 10-year Treasury yield increased 3 bp to 3.57%; WTI crude oil prices increased 2.7% to $72.75 per barrel; and gold declined 0.3% to 1,982.71. 
  • US equities moved higher today following rising optimism on a potential resolution to the debt ceiling, positive trends for regional bank deposits, and continued better-than-expected 1Q23 earnings releases.
  • As part of ongoing debt ceiling negotiations, President Biden described himself as “confident” that lawmakers can reach a bipartisan resolution ahead of an early-June “X-date.” These comments and others combined to lower investors’ concerns on a unfavorable outcome from the negotiations.
  • Additionally, strength in regional bank deposit growth reduced concerns over stresses for the sector. Nonetheless, MS & Co. analysts have pointed to headwinds for regional banks’ business models and earnings potential.
  • 1Q23 earnings reports also continue to be better-than-expected. Retail companies have cited lower freight costs and retail price increases as contributors to their EPS beats. 

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

Source: Bloomberg and Morgan Stanley Wealth Management GIO. Data as of May 17, 2023

Looking Ahead

  • 1Q23 Earnings - Analysts' expectations for the S&P 500 Index's 1Q23 share-weighted earnings growth show a deterioration of 3.4% year-over-year (y/y) on 4.1% 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 (-25.4% y/y), Utilities (-20.5% y/y), Health Care (-16.6% y/y), Information Technology (-10.5% y/y), and Communication Services (-9.0% y/y) sectors, according to Bloomberg. With nearly 92% of the S&P 500's market cap reported thus far, 77% announced earnings ahead of analysts' expectations. In aggregate, for the companies that reported 1Q23, sales and earnings are higher than analysts' expectations by 2.6% and 6.5%, respectively, with the largest earnings surprises in the Consumer Discretionary, Materials, and Industrials sectors. During company 1Q23 earnings calls, investors are 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. 

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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The material has been prepared for informational purposes only and is not an offer or recommendation to buy, hold or sell or a solicitation of an offer to buy or sell any security, sector or other financial instrument, or to participate in any trading strategy. It has been prepared without regard to the individual financial circumstances and objectives of individual investors. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We and our third-party data providers make no representation or warranty with respect to the accuracy or completeness of this material. Past performance is no guarantee of future results. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or under section 4975 of the Internal Revenue Code of 1986 as amended ("Code") in providing this material except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol.

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International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies. Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Ultrashort-term fixed income asset class is comprised of fixed income securities with high quality, very short maturities. They are therefore subject to the risks associated with debt securities such as credit and interest rate risk.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations. 

Companies paying dividends can reduce or cut payouts at any time.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity.

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REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

The returns on a portfolio consisting primarily of environmental, social, and governance-aware investments (ESG) may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. The companies identified and investment examples are for illustrative purposes only and should not be deemed a recommendation to purchase, hold or sell any securities or investment products. They are intended to demonstrate the approaches taken by managers who focus on ESG criteria in their investment strategy. There can be no guarantee that a client's account will be managed as described herein.

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Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

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RSI1684356949307 05/2023

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