Equity Markets Continue Their Descent
U.S. equities declined 16.7% for the second quarter, and 21.1% year-to-date. Foreign equities retreated 13.7% and are down 18.4% year-to-date.
On a style-orientation basis, Value continued its relative performance over Growth. For the quarter, U.S. large cap and foreign developed Value exhibited similar returns, -12.2% and -12.4%, respectively, while U.S. small cap Value declined 15.3% for the quarter. This pattern continues as Value has outperformed broader equity indexes year-to-date.
One safe haven for equity investors was China, which rose 3.4% during the quarter. Expectations for continued economic expansion, backed by accommodative monetary policy coupled with an easing of specific governmental regulations, buoyed this region. That said, overall year-to-date performance through the second quarter declined 11.3%.
Macro Impacts on Economic Sector Returns
Concerns about recession, inflation, the trend in interest rates and the ability for the consumer to navigate through this mire all became front-of-mind issues. Specifically, concerns about the sustainability of consumer spending clearly impacted specific sectors during the quarter.
Consumer Discretionary (-26.2%) and Communication Services (-20.7%) declined because of a perceived crowding out of discretionary spending due to higher costs related to energy, food and other staples. The likelihood of a slowdown in housing, given higher input costs, higher housing prices and rising mortgage rates adversely impacted Materials (-15.9%).
Information Technology (-20.2%) fell given the rise in interest rates, ongoing supply constraints and the pulling forward of purchases by consumers during 2020 and 2021.
Simply put, questions pertaining to the trend in forward revenues and earnings have come to the forefront regarding equities.
Outlook for Revenues and Earnings
According to Refinitiv, analysts have reduced their revenue and earnings estimates for U.S. companies for both the second quarter and also for the next 12 months. This negative revision trend began in April and continued through the end of the quarter.
That said, analysts continue to project growth in both revenues and earnings going forward. Per FactSet, analysts estimate year-over-year (YOY) revenue growth of U.S. companies for calendar years 2022-2024 of 10.9%, 4.7%, and 3.6%, respectively. Estimates concerning YOY growth in earnings has been tempered, but remains optimistic at 9.2%, 10.1%, and 8.4%, respectively, for the years previously mentioned. This downward trend appears to be ubiquitous throughout the globe as analyst revisions for both revenues and earnings involving foreign companies exhibits a similar pattern to that exhibited for U.S. companies. Per FactSet, analysts estimate YOY revenue growth of foreign companies for calendar years 2022-2024 of 1.4%, 2.2%, and 4.0%, respectively. Estimates concerning YOY growth in earnings remains modestly positive at 4.4%, 4.2%, and 4.1%.
Given the rise in interest rates, valuations have become more suspect. That said, valuations for both broad domestic and foreign equity indexes have aligned with their historical averages. Consider the trailing 12-month price-to-earnings ratio (P/E TTM) and the forward 12-month price-to-earnings ratio (P/E NTM) for both domestic and foreign equity indexes versus a 20-year average for each measure.
Currently the P/E TTM for U.S. equities is 18.9x, modestly below its historical average of 19.9x. For foreign equities, the P/E TTM of 13.4x is well below its historical average of 16.2x.
Valuations for the next 12 months may appear more compelling. For U.S. equities, its P/E NTM of 16.2x is in line with its historical average of 16.0x while the P/E NTM of 11.4x for foreign equities is below its historical average of 13.1x.
We anticipate continued volatility within equity markets given the fluid environment previously discussed. Valuation is at the forefront. While analyst estimates may appear optimistic, sentiment and revisions call their optimism into question. During these times, we continue to execute our process and discipline to manage risk and achieve return.