All Fall Down
Broad equity market indexes exhibited negative returns for the third quarter, as the Russell 3000 and the MSCI All-Country World Index ex-USA declined 3.3% and 3.8%, respectively.
On a style-orientation basis within the U.S., Value modestly outperformed Growth for the quarter, declining 3.2% versus 3.3%. Outside the U.S., Value eked out a modest gain of 0.1% while Growth declined 7.3%.
Size and region impacted relative performance as U.S. large cap declined 3.2% while U.S. small cap fell 5.1%. Foreign emerging outperformed foreign developed, the former retreating 2.8% versus the latter declining 4.1%.
Risk On – Risk Off
This past quarter reflected the fluidity of investor sentiment regarding risk. Second quarter reports by S&P 500 companies beat analyst estimates. According to LSEG, 78.8% of companies reported earnings above analyst estimates, which exceeded the long-term beat average of 66.4%. As earnings beats were reported during July, investors bid up equities as analysts revised upward their forward earnings estimates. Expectations for enhanced corporate profitability coupled with the perception that an economic “soft-landing” was plausible fueled positive sentiment by investors. From the end of the second quarter through July 31 the S&P 500 rose 3.2%.
This tenor turned in August as interest rates steadily crept up from 3.8% as of the end of the second quarter to 4.6% at the end of the third quarter. Investor sentiment soured with this “higher-for-longer” rate scenario. From the end of July through the end of the quarter, the S&P 500 fell 6.3%.
It appears that the only consensus concerning the global economy and markets is that no one really knows. Multiple opinions exist, but none lay out a detailed path.
According to FactSet, the U.S. economy is anticipated to grow 2.0% for 2023, with subsequent growth of 0.7% and 1.8% for 2024 and 2025, respectively. This pattern of restrained growth is also exhibited outside the U.S. Other measures of economic activity may not support this dovish scenario.
One factor we continue to monitor is corporate earnings. According to LSEG, analysts estimate earnings for S&P 500 companies grew 1.6% year-over-year (YOY) for the third quarter versus the second quarter’s YOY decline of 2.8%. Analysts also estimate revenues rose 0.8% YOY for the third quarter.
Interestingly the trend in revisions, which contributed to the rise in equities early in the third quarter, has been muddled recently as downward revisions have outpaced upward revisions. For the fourth quarter 2023 analysts currently project earnings will grow 11.0% YOY, a material increase that (if realized) would raise YOY earnings growth to 2.4% for all of 2023.
Going forward, analysts appear optimistic regarding earnings growth for 2024 projecting a YOY increase of 12.1%.
Outside the U.S., analyst estimates for 2023 earnings are somewhat more restrained. For the MSCI All-Country World Index ex-USA, earnings per share are expected to decline 5.3% YOY for 2023, followed by a 10.1% increase in 2024.
Valuations appear mixed. Within the U.S., equities currently trade at 22.9x trailing 12-month earnings and 18.4x next 12-months earnings, both of which exceed their 20-year averages of 20.0x and 16.1x, respectively. Outside the U.S., equities currently trade at 14.4x trailing 12-month earnings and 12.4x next 12-months earnings, both of which are below their 20-year averages of 16.0x and 13.1x, respectively. Note the earnings power of U.S. companies has historically explained the difference in valuations.
Stay the Course
We are presented with a fluid macroenvironment in which the volatility in interest rates is front-of-mind with the ever present question as to the future trend in corporate profitability. We remain vigilant through the continuous application of our time-tested processes that have produced consistent risk-adjusted returns
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.