This article was originally published by TKer.co
Stocks fell last week, with the S&P 500 declining 3.4%. The index is up 9.9% over its October 12 closing low at 3,577.03, and down 17.9% from its January 3-closing high of 4,796.56.
Last week I published a roundup Wall Street forecasters’ outlook for stocks in 2023.
In a nutshell, they were unusually bearish with more than half of them predicting the S&P 500 to close 2023 lower on the year.
The expectation that earnings estimates would be lower is a common risk. revised down further Current levels. (Yahoo Finance’s Myles Udland had a good discussion about this on Friday.) According to FactSet, analysts expect S&P 500 earnings to climb to $232 per share in 2023. Even after months of downward revisionsThis number is higher that all estimates made by equity strategists cited by TKer.
Earnings are everything most important driver of stocks in the long runThis is alarming.
However, at least one top analyst argues these concerns are “overstated.”
There are at most two things you should consider.
Knowing where earnings are going won’t help you
First, the next year’s earnings growth rate won’t tell you much about what stock prices will do in the near-term.
Portfolio manager at Janus Henderson Aneet Chachra reviewed the history to find that the variables had no relationship.
“Unfortunately, correctly predicting future earnings is less useful than one would think,” Chachra found (via John Authers). “Over the long run, S&P 500 earnings and the index itself have unsurprisingly tracked each other, with both series growing at an 8% per annum average pace. But surprisingly, the correlation between year-over-year changes in annual earnings and the S&P 500 Index is almost zero!”
As you can see in Chachra’s chart, the scatterplot is pretty chaotic. With an R-squared of 0.02, there’s effectively no statistical linear relationship between one-year earnings growth and one-year stock market performance.
“‘Knowing’ next year’s earnings growth in advance provides remarkably little insight into what next year’s stock price return will be,” Chachra said.
This is consistent with the fact valuations in one year tell you little about what stock prices will do in the next year. And while we’re talking about the perils of predicting the short-term, the past year’s stock market returns don’t tell you much about the next year’s returns, either.
It is possible that the market bottom has reached.
Second, historically earnings have bottomed. after stocks bottomed. In other words, we can’t rule out the possibility that the October low in the S&P 500 is a typical precursor to some eventual short-term low in earnings we have yet to learn about.
Ari Wald, Oppenheimer’s head of technical analysis, ran the numbers, and published his results in a research note dated November 26, 2006. The emphasis is added:
All of this does not mean that we can eliminate the possibility of stocks falling in 2023. Rather, it’s just to caution against getting too confident about the prospect of stocks falling further, especially with prices down already.
Examining the macro crosscurrents🔀
There are a few noteworthy data points that we can take into consideration from last week.
💳 Consumers are taking on more credit. According to Federal Reserve dataIn October, the total amount of revolving consumer debt outstanding rose to $1.17 Trillion. Revolving credit consists mostly Available for credit card loans
👍 Overall, however, consumers are in good financial health. According to Bank of AmericaThe household checking and savings accounts balances are still above pre-pandemic levels for all income groups.
And while credit card usage has been increasing, consumers are far from maxing out their cards — as reflected by utilization rates below pre-pandemic levels.
💸 Although wages are rising, they are slowing down.. From Indeed Hiring Lab: “In November, posted wages grew a strong 6.5% year-over-year. This impressive figure was a significant decrease from the March 2022 peak of 9%. The drop has been broadly felt, with less than one-fifth of job categories seeing steady or increasing wage growth.“
🤷🏻♂️ Service sector surveys paint a mixed picture. According to ISM surveyNovember saw a significant acceleration in the services sector’s activity. From the report: “Based on comments from Business Survey Committee respondents, increased capacity and shorter lead times have resulted in a continued improvement in supply chain and logistics performance. A new fiscal period and the holiday season have contributed to stronger business activity and increased employment.“
A similar survey was however conducted by S&P Global The opposite was true. From the report: “The survey data are providing a timely signal that the health of the US economy is deteriorating at a marked rate, with malaise spreading across the economy to encompass both manufacturing and services in November. The survey data are broadly consistent with the US economy contracting in the fourth quarter at an annualized rate of approximately 1%, with the decline gathering momentum as we head towards the end of the year.“
📉 The rate of inflation in service price is slowing. The ISM and S&P Global services surveys both confirmed that price inflation for services cooled in November. From the ISM: “The Prices Index was down 0.7 percentage point in November, to 70 percent.“ From S&P Global: “A striking development is the extent to which companies are increasingly reporting a shift towards discounting in order to help stimulate sales, which augurs well for inflation to continue to retrench in the coming months, potentially quite significantly.“
📉 Inflation in wholesale prices is decreasing. According to Bureau of Labor StatisticsThe producer price index (PPI), which was 7.4% higher than a year ago, was 5.4% in November. The core prices rose 4.9% excluding food and energy. PPI increased 0.3% month-over-month, while core PPI rose to 0.3%.
⛽️ Gas prices are falling. This year’s spike in gasoline prices has disappeared.
👍 Inflation expectations are rising. From the University of Michigan’s December Survey of Consumers: “Year-ahead inflation expectations improved considerably but remained relatively high, falling from 4.9% to 4.6% in December, the lowest reading in 15 months but still well above 2 years ago. Short-run inflation expectations showed a decline across all demographics, including age, income and identification of political parties. At 3.0%, long run inflation expectations has stayed within the narrow (albeit elevated) 2.9-3.1% range for 16 of the last 17 months.“
⛓️ Although supply chains have tightened, they are still much more flexible than they were one year ago. The New York Fed’s Global Supply Chain Pressure Index1 — a composite of various supply chain indicators — deteriorated slightly in November. The report states that the largest contributor to supply chain pressures was the Chinese delivery times. However improvements were seen in the U.S delivery times and Taiwanese orders.
It all comes together🤔
The rate of inflation is falling from its peak. However, inflation is still very hot and needs to cool down further before people can be comfortable with their current price levels. We should therefore expect the following: Federal Reserve to continue to tighten monetary policyTighter financial conditions, such as tighter lending standards and higher interest rates, are a sign of a tighter financial environment. This means that there are higher interest rates as well as stricter lending standards. All this has to mean: the market beatings will continue The risk economy sinks In a recession, the pressure will increase.
But it’s important to remember that while recession risks are rising, consumers are coming from a very strong financial position. Unemployed people getting jobs. The salaries of those who have jobs are increasing. Many still have jobs. excess savings To tap into. Strong spending data is a strong indicator of financial resilience. So it’s too early to sound the alarm from a consumption perspective.
This is the point where any downturn is unlikely to turn into economic calamity The following are the highlights financial health of consumers and businesses remains very strong.
Long-term investors must remember that recessions And bear markets You can find them here part of the deal If you want to earn long-term profits, then you should consider entering the stock market. However, markets have had a terrible year so farThe stock market’s long-term outlook remains positive.
This article was originally published by TKer.co
Sam Ro is founder of TKer.co. Follow Sam Ro on Twitter @TKer.co @SamRo
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