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Equities on the sidelines, rates up, and bonds down. First results for 1Q23 from US corporates were very good. Worries about the Fed’s hikes continue to persist. Continue to be moderately positive on Equities (but watch out for stops!) and neutral on Bonds.

Major market events 24th April – 28th April 2023

Highlights for the week

Mon: German IFO Business Climate Index.

Tue: US Building Permits, US New Home Sales, US CB Consumer Confidence.

Wed: SW Interest Rate Decision, US Core Durable Goods Orders,

Thu: US GDP, US Initial Jobless Claims.

Fri: German Unemployment Rate, German GDP, German CPI, EU GDP, US Core PCE Price Index.

Performance Review

  • Another week on the standstill for equities, rates up, and bonds down. Early reports for 1Q23 were mostly positive. There are still expectations that the Fed will hike (at least) one more time in May.
  • With such subdued moves in the indices, rotation took a pause. So did the Nasdaq; but that is unlikely to last with many crucial reports next week. There is increased evidence of concentrated performance for both the S&P 500 and the Nasdaq 100, and those leaders have to continue to both report and perform well if the market is to go any higher.
  • Technically we are still in limbo: the Nasdaq 100 is well clear of its previous top on Feb 2 (12,803.14), but the S&P 500 hasn’t managed to do that yet (4,179.76). On the positive side, if the S&P 500 manages to climb above its previous top, I can see an extension of the current rally; on the negative side, should the Nasdaq 100 fall below its previous top on Feb 2 then much more caution should be exercised (a chance of a double top and of the market re-testing recent lows). In addition, the Euro Stoxx 50 is approaching its previous peak set in July 2007 (4524.45) and a breakout above that level might signal another leg up for equities.
  • The never-ending discussion on rates continues; this week’s musings see the market pricing in a 25 bps hike in May, which could be the last; Goldman Sachs has removed a 25 bps hike in June from its forecast. But in the process of a transition from a monetary risk to market risk, people have been focusing on the job market lately with a sense of increased worry, as its recent weakness portends the upcoming recession most see in 2H23. Although earnings are expected to decline in 1Q23, this could be their trough; so far reports were encouraging. It is important to see if bottom-up forecasts for both 2023 and 2024 continue to be cut or, at some point, manage to find their feet.
  • 1Q23 earnings reports will continue this week with some notable companies reporting. Obviously, these reports could tilt the market either way. We shall see as we go.

Checking up on the economy: the good

The ‘good’ points to more sustained growth and no recession, albeit at the cost of higher rates (the ‘higher for longer’ moniker that is soon becoming a mantra). There does seem to be a change in the narrative though, at least according to what is being priced by the market, with rates becoming less of a concern and the economy’s performance becoming more of a concern. Meanwhile, there is evidence of a certain stabilisation in deposits, which is much welcome after the tensions of Silicon Valley Bank.

Source: Federal Reserve

There is an update in the Fed Funds Futures Curve, which saw the curve move to the right last week as a reflection of higher rates. I have put this amid the positive aspects because if the next hike in May is really the Fed’s last, the market would certainly celebrate the removal of the overhang and won’t mind (too much) the 25 bps increase in rates.

Source: The Daily Shot

Finally, there is evidence that the job market is cooling. Although this data can be interpreted in two ways (good for rates and not so good for the economy), I put it here as it contributes to a positive scenario on rates as described above.

Source: The Daily Shot

Checking up on the economy: the bad

Let’s start with this chart with a very useful reminder: earnings do not survive recessions. So we absolutely must avoid one if we are to thrive. And the pressure on the stock market happens during the recession and not in the 12 months before. The outlook for the S&P 500 is mostly negative, and the average price at the end of the year does mean that a downside is likely from the current levels.

Source: J.P. Morgan Strategic Research

The US LEI is predicting a recession in the next 12 months. Its negative revision has been ongoing for quite a while.

Source: The Conference Board

Finally, the M2 annual change has been a good predictor of GDP’s annual change, and it has turned negative after the Silicon Valley Bank failure, putting further pressure on the economy,

Source: Real Investment Advice

Checking up on the economy: the ugly

Valuation certainly isn’t cheap. It is even less so considering such appealing yields, particularly on the short end. This has led some to speculate that the current P/E is unsustainable. The current P/E of 18.2 is higher than the 10-Year average of 17.3.

Source: BofA US Equity & Quant Strategy, BofA Global Investment Strategy

Furthermore, inflation is high in many parts of the world. Europe as a whole never had inflation higher than at present, and hence the ECB is likely to continue hiking to bring it under control, In the US there has been some success in reducing it further, but the Fed is not quite finished yet.

Source: BofA Global Investment Strategy, Bloomberg

Finally, more concerns about global growth come from weak exports in Taiwan, likely to drag the global EPS model lower. BofA currently forecasts top-down earnings for the S&P 500 to be $200 for 2023, a decline of 9% relative to the past year (Goldman Sachs $224; J.P. Morgan $ 205; Morgan Stanley $195).

Source: BofA Global Investment Strategy, Bloomberg, Datastream, IBES, MSCI

Sentiment and what the market is telling us

The Fear and Greed Index is still in Greed territory, ending the week with a reading of 65, stable from last week’s reading of 65. It seems to move in synch with the market’s recent moves.

Source: CNN Business

The AAII Sentiment sees a prevalence of neutral views, way ahead of the historical averages, as the bearish views, leaving the bulls in the minority. This reflects the current dilemma in the market, torn between making higher highs (despite the high valuations) and retracing recent gains.

Source: AAII Sentiment Survey

What are the Flows telling us?

It should be no surprise that there are positive flows to money market funds, even with a distinct choppiness in performance in the last few weeks. The current yields offered are attractive, and with the peak in rates coming soon, a very strong performance is within its sights.

Source: Datastream, Haver Analytics, EPFR, Goldman Sachs Global Investment Research

At the same time, there were notable inflows in healthcare recently. It looks like investors are positioning more defensively in the current scenario. Let’s see if 1Q23 earnings can change investors’ minds.

Source: BofA Global Investment Strategy, EPFR

Earnings Review

Source: FactSet

The forward 12-month P/E ratio for the S&P 500 is 18.2x, down from last week’s reading of 18.3x, which is below the 5-year average at 18.5x but above the 10-year average at 17.3x. The present, bottom-up level ($220.24) is beginning to slip from Goldman Sachs’ top-down $224 forecast. As we have been going down steadily for a while, I just wonder if at some point down the year the US Corporates will find in them what it takes to reverse this trend, as forecasted to happen in the back half of the year.

For 1Q23 the forecasted EPS decline for the S&P500 on aggregate is -6.2%. If correct, it will mark the biggest decline since 2Q20, when such a decline was -31.6%. The upward revision to 1Q23 earnings growth (-6.2%), has been positive if compared to 31 Mar’s -6.7%, but it is still very early days. Despite the concern about a possible recession next year, analysts still forecast a positive growth in earnings for the overall market in CY 2023 of 0.8% year on year, revised downwards from 0.9% last week, versus 1.4% on Mar 31, while revenue is forecasted to grow by 2.1% vs 2.1% on Mar 31.

Source: Factset

With estimates now measured against the forecasts as of Mar 31st, there are very few differences yet. Of note, Information Technology growth is negative -0.6%. We will see if this is confirmed by the upcoming reports.

Source: Factset

The S&P 500 has its revenue growth estimates stable from last week at 2.1%. Financials are still leading the pack in terms of revenue forecasts. Information Technology revenue growth has been cut to 1.1% from 1.3% on Mar 31st. The sector seems to be doing better on the top than on the bottom line, perhaps signaling the reason for some of the layoffs.

Source: Factset

Let’s take a look at EPS for 2023 and 2024, which last week had the first upward revision in quite a while. The forecast for 2023 has now been updated to $220.24 from last week’s reading of $220.21; while 2024 is currently forecasted to be $246.16, compared to last week’s reading of 246.68. I look with much interest at further revisions as the 1Q23 report season gets underway in April.

Source: Factset

This is the detail for 2Q23. While the market might be more concerned about rates and recession than earnings at this point, the latter’s deterioration is continuing to get me worried as the downward revisions have been relentless and guidance very muted. It seems almost a miracle that the market managed to stay afloat with these shrinking earnings. 4Q22 is over, but 1Q23 looks to start much in the same fashion, with a significant earnings decline. April will see the beginning of the reporting for 1Q23, and I will be looking at it with much interest.

Earnings, What’s Next?

The earnings season is now entering in full its 1Q23 reports. Here’s a list of companies reporting this week. Highlights include McDonald’s (Tuesday, Before Open), Microsoft (Tuesday, After Close), Alphabet (Tuesday, After Close), Texas Instruments (Tuesday, After Close), Meta (Wednesday, After Close), Mastercard (Thursday, Before Open), Amazon (Thursday, After Close), Intel (Thursday, After Close).

Source: Earnings Whispers

Market Considerations


Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.1% on Mar 31st) and earnings growth estimates for 2024 are predicted to grow by 11.9% (12.1% on Mar 31st), so the future looks to be bright. While we continue to debate whether the US economy will fall into a recession or not and what will be the peak rates for Fed Funds, we should take note that almost every strategy has seen a more defensive positioning in the last month.

We are probably shifting from a monetary risk to a macro risk, where the performance of the economy is more important than what the Fed does. We should be mindful that the economy is probably just doing ok, even though passing the peak in rates will remove the overhang present on the market. If and when rates will diminish in importance, earnings (and top-line growth) will hopefully pick up their pace.

The Nasdaq has been able to climb above its peak of 12,803.14 on 2nd February, and now it’s time for the S&P 500 to follow through (its peak is 4,179.76 on the same day). Despite being several pressures against Equities, tactically continue to suggest staying long on Equities, as long as the Nasdaq 100 stays above the Feb 2nd peak. Either the S&P and the Euro Stoxx 50 will be able to climb above their previous peak, which would open a new leg up for equities and for the market, or they don’t, and we fall in double-top territory with the markets possibly revisiting their recent lows. Regarding bonds, the trajectory is that yields will eventually fall, albeit with a few bumps on the road.

For the less volatility prone of you, it may make sense to take all opportunities to alter the weights of your asset allocation by increasing the weights of safety assets at the expense of more risky assets by lightening up in equities and reinvesting in bonds at attractive (approx 4%) yields. For those willing to look besides US treasuries, investment grade bonds (LQD ETF) could also be a good compromise: 1.2% pickup over government bonds for the safest part of the credit complex may still be compelling. 10-Year yields were turbulent last week, both in the US and Europe, though the ceiling should be near for both. For those wishing to keep their money in Equities with lower volatility, suggest switching to Japan as the company with the most stable outlook (the country with the more precise picture of rates at the moment) until rate perspectives become clearer in the US and Europe. They got a boost given the recent buy recommendation by Warren Buffett, and the oracle is very rarely wrong. So Japanese Equities are now investable regardless of the lower volatility derived by being the only nation in G7 not to raise rates in the current environment.

Happy trading and see you next week!



All views expressed on this site are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. I assume no responsibility for any errors or omissions in the content of this site and there is no guarantee for completeness or accuracy. The content is food for thought and it is not meant to be a solicitation to trade or invest. Readers should perform their investment analysis and research and/or seek the advice of a licensed professional with direct knowledge of the reader’s specific risk profile characteristics.

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