Since the last commentary, our overall market message remains the same. The market has bounced around within a range for the past year as it has digested the competing forces of sticky inflation, economic resiliency, and Fed policy uncertainty. Inflation continues to fall, and the Fed is near the end of their rate hike cycle. These two things are positive for the market. But economic uncertainty remains, with many indicators foreshadowing a slowdown or recession. We believe risks to the market remain high in the coming months.
However, we caution investors against getting too negative. Last year’s declines have already discounted a lot of bad news. Earnings expectations have come down significantly. That said corporate and consumer balance sheets remain strong, and there are no warning signs in the credit market. Bank of America’s fund manager survey recently showed that investors are more negative than they have been at any point since the survey began in 2001. Sentiment and investor positioning can often be a contrary indicator at extremes.
Companies began reporting earnings for the first quarter of 2023 in the middle of April. Thus far, with about one quarter of S&P 500 companies having reported, we would characterize the theme as “better than feared”. So far, 78% of companies that have reported to date have beaten the earnings estimates, and they have done so by a median of 7%. Both figures are above their respective 5-year averages (all data from Fundstrat and Factset). This speaks to the idea that market-wide expectations have already come down substantially.
Based on the current data our gameplan remains to reduce risk if/when the market nears its highs from the prior 12 months.
