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Perspectives

Reprieve In Bonds Allow Stocks To Rise

by Fortem Financial October 31, 2022

Equities were higher for the second straight week (S&P 500 +4.0%). Despite multiple megacap earnings disappointments, the market remained resilient. The market is embracing the idea that the Fed could soon begin to slow the pace of tightening. Best performers were industrials (+6.7%) and utilities (+6.5%); worst performers were communication services (-2.9%) and consumer discretionary (+0.7%).

3Q Earnings Season Turning Out To Be Underwhelming

With the third quarter earnings season about halfway complete, EPS growth is expected to be 4.2% and sales growth is running at 10.3%. Excluding the energy sector, earnings growth would be negative. As we have mentioned in previous quarters, the strength of energy continues to mask some of the weakness in profits that the index is already dealing with.

S&P 500 3rd Quarter Earnings Scorecard

2023 EPS Estimate Falls Below $235, Expected Growth Drops To Less Than 6%

With guidance softening for next year, the 2023 EPS estimate has now fallen below $235 with the growth rate falling to just below 6%. We continue to believe that earnings need to come in further especially if the economy is facing a recession in 2023. Our estimate of $200 for next year remains well below the consensus and would indicate a roughly -10% decline year over year.

2022 & 2023 S&P 500 EPS Progression & Growth Rate (Source: FactSet)

Margins Continue To Deteriorate

Margins have held up better than we initially expected due to the strength of the energy sector. However, the deterioration that we anticipated is still occurring, albeit at a slower pace. To the extent to which margins continue to slide, equities will likely continue to face pressure, making sustained equity rallies more challenging. Furthermore, the daily average of oil & gas prices during the fourth quarter is on pace to be lower than the 3rd quarter average which suggests energy profits may have peaked.

Estimated Next 12-Month S&P 500 Operating Margin

Off The Highs But Cost Inflation Remains Frequently Cited

As we look for signs of inflation peaking, analyzing transcripts of S&P 500 companies for “cost inflation” shows inflation may have peaked, but it is likely to remain elevated. The best we can tell is that labor remains tight with wages still rising despite bottle necks clearing and prices coming down for shipping services. As long as the economy is strong and inflation indicators remain elevated, the Fed likely has further to go with regard to rate hikes.

S&P 500 Transcript Analyzer: "Cost Inflation" Rolling 3-Month Sum

Source: Strategas

Market index
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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