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Equities down, rates up, and bonds down again. Approaching the turbulent back half of September with greater care (and prudent risk management). Watch out for more evidence of disinflation (and of an improving environment) in US CPI and PPI on Wednesday and Thursday. Continue in general to be positive on equities, and warming up on bonds. As usual, 3Q23 earnings (starting in October) will be key. The Fed should pause in September, again, but November is now a live meeting.

Major market events 11th – 15th September 2023

Highlights for the week

Mon: CN New Loans

Tue: UK Unemployment, DE ZEW Economic Sentiment, IN CPI

Wed: JP PPI, UK Manufacturing Production, UK GDP, US CPI

Thu: JP Industrial Production, CH PPI, ECB Interest Rate Decision, US Retail Sales, US PPI, US Initial Jobless Claims

Fri: CN Industrial Production, CN Unemployment, FR CPI, EU Trade Balance, US Industrial Production

Performance Review

Dow Jones34,837.4134,576.39-0.75%4.35%
S&P 5004,515.774,457.49-1.29%16.56%
Nasdaq 10015,490.8615,280.23-1.36%40.67%
Euro Stoxx 504,282.644,237.19-1.06%9.88%
Nikkei 22532,710.6232,606.84-0.32%26.79%
Source: Google
  • Clouds over September and retracement from the previous positive week. The turmoil in rates/bonds continues, even amid positive signs regarding at least a stabilization of inflation. Rates continue to shoot up across the world with the exception of Japan, and soaring yields dampened the appetite for equities and for risk assets in general. Hence in the current lull in corporate earnings, and with macro factors dominating, it should come as no surprise that the week went south. Once again, data will be key in driving the Federal Reserve going forward, but under the current environment talking about 6% is no longer taboo. Will see if Fed Funds will touch that level, and how quick the Fed will cut rates when it becomes clear that the economy is slowing (hopefully after having the key inflation target of 2% in sight). This week we’ll have the US CPI on Wednesday and the US PPI on Thursday – let’s see if the flow of more positive, disinflationary data continues.

  • Last week, value and growth performed pretty much in line, even though value always has the upper hand when stocks are sinking. No big changes on a country level – Japan was the best market once again, supported by a dovish Central Bank. The JPY was fairly stable last week. Europe and the US performed pretty much in synch; Apple was under pressure due to a ban on foreign handsets (!) by government officials. The stock did react badly but look forward to their September 12 presentation of new products for a bounce. The European markets have proved to be more fragile than their American counterparts, notwithstanding the great performance of Novo Nordisk, which overtook LVMH as the European Company with the largest market cap, and notwithstanding a rather inexpensive valuation. If you would like to test the waters (this is particularly true for the Nasdaq 100 and Nikkei 225), I recommend having a weekly stop of 3% as timing the market is now even more difficult.

  • Once again it was Japan’s turn to shine, with the Nikkei 225 being the best market for the second week in a row. Europe needs to consolidate and lick its wounds before trying to resume the climb to its previous high set in July 2007 (4524.45), so the leadership will in all likelihood continue to be provided by the S&P 500 and the Nasdaq 100 which are now chasing their all-time highs, despite last week’s setback. There is an almost perfect consensus – 92.0% – according to the CME FedWatch tool – for the Fed to be on hold in September – which would be the second time this year. November has turned into a live meeting, as there is a 47% chance we will see higher rates. European markets are in a more complicated position: for starters, the ECB is well behind the Fed in its quest for the terminal rate (as is the BOE), and needs a sustained performance of broader equities (not technology) to go higher still. We’ll hear from the ECB this week, and even though the BOE officials have mentioned that rates have been nearing their peaks, I fear that we’ll see a further hike(s) before reaching the top.

  • We’ve heard for some time about a hard (more likely) or soft landing for the economy, with a recession that was supposed to begin as early as in 2Q23, and the US economy seems to have performed better than anyone expected. Indeed, the Atlanta Fed’s GDPNow model is currently forecasting 3Q23 growth of 5.6%. This has led analysts to increase EPS forecasts for the first time in the last 2 years (since 3Q21). Goldman Sachs, which has been spot on in its forecasts on the economy, is now forecasting a 20% chance of a recession in the US in the next 12 months, with lots of disinflation to take place in 2H23, and at the same time, it maintains higher than consensus estimates for US GDP. After having gone past the rates tantrum, the baton passes on to the economy, which so far has performed admirably, despite the tough environment. In 2H23 it is expected that the economy will meet a more benign rate environment, although we need to see if earnings will trough in 2Q23 and bounce in the back half of the year.

  • We are reaching the end of the 2Q23 earnings reports, and this week we will be able to witness results for 3 summer months from companies that report a month early like Oracle.

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 soon becoming a mantra), even though expectations for rate cuts are slowly being shifted to 2024. 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 an issue. Introducing the Atlanta Fed GDPNow estimate for 3Q23, which at 5.6% would account for staggering growth. As before, there is a meaningful difference between this forecast and the consensus for Blue Chips; they will have to converge at some point. It is good and notable to see that these are in positive territory and have been improving (=no recession) in the last two months or so, with the Blue Chips consensus now moving ahead of 2%.

Source: Blue Chip Economic Indicators and Blue Chip Financial Forecasts; Federal Reserve Bank of Atlanta

Coupled with the chart just above, the chart below brings testimony of an improving sentiment and an earnings recovery. Both of these are very welcome, and as I have been saying for some time, an increase in earnings (and a turnaround from the negative revisions in 1Q23 and 2Q23 are absolutely crucial to lower and help sustain the current high multiple. While we will have our answer roughly in a month’s time, it is worth paying attention to Oracle on Monday after close as first evidence of how things have been over the summer and, perhaps even more importantly, in techland.

Source: BofA Global Research, FactSet,

To end this hattrick of positive news about GDP growth and corporate sentiment, I should definitely mention that there is evidence of stabilization in earnings for the S&P 500. Guess which market is having the best earnings perspectives at the moment? It’s Japan once again. Watch out for the JPY!

Source: Goldman Sachs,

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. While the debate is very much alive and the jury’s still out, there are some indications that show the economy to be in trouble and likely to fall into a recession. One of these is the probability of recession as calculated from the yield curve, currently showing a probability of 70.65%. I would further note that when this level was so high, a recession promptly ensued. This time is different? At least it has been falling from its recent peak, but considering the state of the bond market it has to be expected. Something is rotten in the state of Denmark.

Source: Federal Reserve Board, Federal Reserve Bank of Cleveland, Haver Analytics

Introducing some new, bearish forecasts from Morgan Stanley that see S&P 500’s earnings cut from $195 to $185 (bottom-up consensus: $221; top-down consensus: Goldman Sachs $224, J.P. Morgan $205, Bank of America $200). Should such a scenario (which would include a rather severe recession) come true, the market would undoubtedly be under much pressure, hammered by a powerful double whammy of a hit on its multiple and its earnings. With analysts upgrading earnings forecasts for the first time since 3Q21 and with positive GDP forecasts as a tailwind, we can now see some evidence that earnings can rebound in 3Q23 after finding their trough in their current (2Q23) quarter.

September (downdraws) and October (volatility) are difficult for the stock market. Never mind that the St Leger’s Day falls on September,16th the charts below tell us that it is primarily in the back half of the month that troubles arise. So, I’d advise waiting before ‘coming back on St Leger’s Day’. The problem is that there usually are 3.4% pullback on average in a year on the S&P 500, and so far we just had one. Some market pundits are suggesting that these could be interesting entry levels for those that missed the rally so far, and while I do not disagree, I suggest to look at your stops very carefully. Better safe than sorry.

Source: BofA US Equity & Quant Strategy, Bloomberg,

The Unemployment level might be about to turn. ,Initially it will be welcomed as it will lower the probability of higher rates, but if sudden it can also lead the economy to a recession. Something to watch.

Source: U.S. Bureau of Labor Statistics

Checking up on the economy: the ugly

Valuation certainly isn’t cheap. It is even less so considering such appealing yields. This has led some to speculate that the current P/E is unsustainable. The current forward P/E of 18.6 is lower than the 5-year average of 18.7 and the 10-year average of 17.5. Hence earnings are of paramount importance. It is true that the market is expensive, but it much depends on the outlook for earnings in 3H23. If the economy can continue to perform, it would seem feasible to see the market trading around such multiples, perhaps with a slight compression due to the better results reported.

The chart below offers a comparison of earnings yields and cash yields, stating that when the former gets below the latter, a market selloff would promptly ensue. It is true that earnings have been under pressure, as the current quarter 3Q23 could be the first quarter of year-over-year earnings growth since 3Q22. This is very relevant and highlights the preference for cash of many investors. Still, earnings have to improve – let’s hope they will in 3Q23.

Source: BofA Global Investment Strategy, Bloomberg,

This is really ugly. While this chart highlights the S&P 500 as the best performer of the year, it also highlights the very poor year that REITS and Real Estate are having, which is not good and rhymes with the nightmare that has been the fixed income space. There is one solution – we need lower rates. Hopefully, 2024 will provide what we need (I’m not too optimistic we’ll get this in 2023 given that expectations are for even higher rates still …)

Source: BofA Global Investment Strategy, Bloomberg,

Source: The Daily Shot,

Sentiment and what the market is telling us

The market goes down and it’s only fair to find the Fear and Greed Index a little lower, still in Neutral territory, ending the week with a reading of 51, down from 56 last week.

Source: CNN Business

The lagging AAII Sentiment Survey, on the back of the positive rally we witnessed two weeks ago, saw an increase in bullish positions this week, getting them to a relative majority.

Source: AAII Sentiment Survey

What are the Flows telling us?

Tech no longer good? Investors getting cold feet? Or just taking profits home? Whatever of these reasons hold true, there has been the first week of negative flow in Technology after a very long run of positive inflows.

Source: BofA Global Investment Strategy, Bloomberg,

Asia-Pacific Equity markets have the best inflows, and Europe the worst. It is notable to see that – despite the high rates (maybe investors are banking on a reversal?) – there are still very solid flows into Emerging Markets.

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

Earnings Review

Source: FactSet

The forward 12-month P/E ratio for the S&P 500 is 18.6x, which is below the 5-year average at 18.7x, but above the 10-year average at 17.5x. The present, bottom-up level for S&P 500 earnings ($222.23) is hovering just below Goldman Sachs’ top-down $224 forecast, but it did manage to reverse its course after 2Q23. It will be key to continue to monitor whether these increases in estimates continue as reporting for 3Q23 comes in, as forecasted to happen in the back half of the year.

The upward revision to 3Q23 earnings growth (0.5%), has been positive if compared to 30 Jun’s 0.0%; we won’t have much to wait for the actual results, which could be better than what is currently forecasted. 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 1.2% year on year, vs 0.5% on Jun 30, while revenue is forecasted to grow by 2.4% vs 2.4% on Jun 30.

Source: FactSet

With estimates now measured against the forecasts as of Jun 30th, there are very few differences yet. Of note, Information Technology’s growth is now positive by 3%, greatly outstripping both earlier negative forecasts (of as much as -1%) and their Jun 30th previous reference (0.7%).

Source: FactSet

The S&P 500 has its revenue growth estimates at 2.4%, level with last week’s. Consumer discretionaries are now leading the pack in terms of revenue forecasts. Information Technology revenue growth has been revised upwards to 1.9% from as low as 0.7% and is now better than the 1.5% recorded on Jun 30th. 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 a minor downward revision. The forecast for 2023 has now been updated to $222.23; while 2024’s EPS are currently forecasted to be $248.58.

Source: FactSet

This is the detail for 3Q23. While the market might be more concerned about rates and recession than earnings at this point, the narrative is changing from rate risk to macro risk where earnings will be of paramount importance. Once again the market repeated its 1Q23 feat, by having a lower-than-forecasted loss for 2Q23 and forcing analysts to upgrade their estimates. Stay tuned.

Earnings, What’s Next?

The earnings season is now ending its 2Q23 reports in earnest. Here’s a list of companies reporting this week. Highlights include: Oracle (Monday, After Close), and Adobe (Thursday, After Close)

Source: Earnings Whispers

Market Considerations

Revenue growth estimates for 2024 are forecasted to grow by 5.6% (5.0% on Jun 30th) and earnings growth estimates for 2024 are predicted to grow by 12.2% (11.8% on Jun 30th), 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 welcome the arrival of a new bull market for the S&P 500 (+20% from the October lows). September and October are traditionally two difficult months, so my optimism is somehow tempered here, even though the strong performance so far should prevent a catastrophe.

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

So the breakout happened, with both the S&P 500 and the Nasdaq 100 ahead of their previous Feb 2 highs. Next week will probably be sideways/down again, as the market consolidates and forms a base around current levels. Still, I tactically continue to suggest staying long on Equities, with a 3% weekly stop, even though taking a break and bringing home the profits might well make sense given the difficult seasonality, as long as the S&P 500 and the Nasdaq 100 stay above their Feb 2 peaks (4,179.76 and 12,803.14 respectively). Regarding bonds, the trajectory is that yields will eventually fall, albeit with a few bumps on the road, although given the new Fed’s forecast, we might have to wait until 2024 for that.

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 (4%+) yields. 10-year yields were up once again last week 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. Just watch out for the JPY – if the current strength in the economy and markets is to continue, you may want to hedge it as it will likely continue to slide (against all major currencies).

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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