Wealth Management — May 2, 2023
What Happened in the Markets?
- The S&P 500 Index fell 1.2% Tuesday to end the day at 4,119.60, 7.3% higher year to date.
- Ten of the 11 S&P 500 sectors were lower on the day, as Consumer Discretionary (+0.2%) and Consumer Staples (-0.3%) outperformed the S&P 500 Index, while Financials (-2.4%) and Energy (-4.3%) underperformed.
- By the 4pm equity market close, the US 10-year Treasury yield declined 14 basis points to 3.42%, while WTI oil decreased 5.3% to $71.64 per barrel.
- Today brought a spike in volatility as renewed regional bank concerns led to a selloff and multiple trading halts. As a result, investors flocked to quality and bonds rallied.
- Additionally, in economic news, job openings data came in below expectations – available positions decreased to 9.59 million from 9.93 million, the lowest level in almost two years. Meanwhile, the quits rate ticked down from 2.6% to 2.5%, indicating fewer people are quitting their jobs.
- Fed Chair Powell is expected to announce a 25-basis-point rate hike tomorrow afternoon following this week's two-day Federal Open Market Committee (FOMC) meetings. Currently, the market is expecting this rate hike to be the final increase before the FOMC decides to pause for a period of time. MS & Co.'s Mike Wilson says, “If the message delivered at this meeting is more hawkish, it could provide a near-term negative surprise for equities.”
S&P 500 Price vs. 50, 100, 200 Daily Moving Averages
- 1Q23 Earnings - As of last Friday, analysts' expectations for the S&P 500 Index's 1Q23 share-weighted earnings growth showed a deterioration of 4.5% year-over-year (y/y) on 3.1% y/y revenue growth. This included estimates for earnings declines in seven sectors, and revenue declines in three sectors. The most significant declines in earnings were expected in the Materials (-29.8% y/y), Health Care (-19.8% y/y), Information Technology (-12.3% y/y), and Communication Services (-8.9% y/y) sectors, according to Bloomberg. With nearly 68% of the S&P 500's market cap reported thus far, 80% announced earnings ahead of analysts' expectations. In aggregate, for the companies that reported 1Q23, sales and earnings are higher than analysts' expectations by 2.3% and 7.1%, 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
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.