Has Spring Sprung?
U.S. equities rose 7.2% during the quarter, posting the same quarterly return as that of fourth quarter 2022. Growth materially outperformed Value, 14.4% versus 1.1% respectively. U.S. Large Caps rose 7.5%, primarily given the support from growth-oriented companies. Interestingly, U.S. small caps started the year outperforming every equity sub class, only to retreat and close up a modest 2.7% for the quarter. Foreign equities advanced 7.0%, as developed markets rose 8.6% while emerging markets increased 4.0%.
While the first quarter of 2023 may have surprised to the upside, investors continue to be wary of the sustainability of returns exhibited.
What Type of Landing?
Investors have been faced with numerous scenarios regarding the efficacy of monetary and fiscal policy on economic growth. Will a hard landing occur, one that results in a swift downturn resulting in an economic recession? Or will a soft landing occur, where the economy slows yet does not enter into a recession?
Recently, measures of the direction of economic trends have been mixed. According to S&P Global’s Flash Composite PMI™, most regional purchasing managers’ index (PMI) composites (which are seen as a leading indicator of economic conditions), appear to exhibit a revival in economic activity. Regional service components of PMI appear above 50, which implies expansion, while manufacturing components (for the most part) appear below 50, which indicates contraction. Within the U.S., the PMI Composite exhibited a 10-month high at 53.3, supported by an 11-month high of 53.8 in the services activity index with manufacturing trending upward to 49.3, which in itself is a five-month high.
While PMIs are but one indicator, equity market performance appears to be correlated with the direction of PMIs.
Consider corporate profitability, as measured by the earnings per share (EPS) of the S&P 500 Index. Specifically, the environment of two recent market drawdowns versus current estimates.
Data via FactSet indicates EPS fell 15.6% year over year (YOY) for calendar-year 2009 when the economy was coming out of the Great Financial Crisis. In 2020, EPS for this index fell 13.7% YOY during the COVID pandemic. So how do current EPS estimates compare?
For calendar 2023, analysts estimate EPS will grow 1.7% YOY, which is small but positive. Per Refinitiv, earnings are expected to decline 5.0% during the first quarter just ended. As of the end of last year, EPS growth for the first quarter was estimated at 1.4% YOY.
For the second quarter of 2023, analysts estimate earnings will decline 3.9% YOY. Thereafter, earnings are expected to grow YOY by 2.8%, and 10.5% for the third and fourth quarters, respectively.
This theme of growth is reflected in a similar expectation for revenues to increase YOY by 1.8% for 2023.
A related trend is apparent for companies outside the U.S. According to FactSet, analyst estimates for the MSCI All Country World Index ex USA project YOY growth in EPS of 1.1% and 4.4% in revenues.
One must consider these and other aspects when developing an outlook. Uncertainty about Fed policy, its terminal rate and duration until prospective easing has been top of mind for investors. The catalysts previously mentioned may be undermined should the various geopolitical challenges intensify in Ukraine, the prospective reaction by Russia to an expansion of NATO, and continuing challenges with China.
We anticipate volatility will remain evident within the equity markets going forward. Markets are forward looking, and while change is inevitable, no one can predict with exact certainty the outcomes afforded in the future. Our proprietary process emphasizes risk management. As such, we remain neutral across the various equity sub classes and our bias remains toward liquidity as investors digest and react to changes that may occur.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.