The year 2022 will go down as a year that most may want to forget, given the negative returns we experienced. The drawdown in equities was the worst for a calendar year since 2008. U.S. equities, as measured by the Russell 3000 Index, declined 19.2% year-over-year. Foreign equities, as measured by the MSCI All-Country World Index ex-USA, fell 16.0%. In all, 2022 ranked as the third worst year of the last 43 years regarding calendar year performance and the third worst year of the last 20 years (surpassed only by 2008 and 2002).
While most investors would like to forget 2022, there are lessons to glean from this past year.
An expansion in valuations began, as represented by the price-to-earnings(P/E) ratio, after 2015’s coinciding decline in interest rates and quantitative easing. Equity valuations were bid up, especially the prices of companies that exhibited the potential for above-market growth in revenues and earnings. Coupled with the There is No Alternative (TINA) effect, technology-related companies led the rally (recall the FAANG stock phenomena, with Facebook, Apple, Amazon, Netflix and Google), further contributing to the broad expansion in P/Es.
Valuations matter such that, going into 2022, a recalibration in valuations had already begun. P/Es began to compress during 2021 and continued to do so throughout 2022. Currently, the P/E Trailing Twelve Months (TTM) for U.S. equitiesstands at 19.4x, modestly below its 20-year average of 19.9x. Similarly, the P/E TTM for foreign equities stands at 13.2x, materially below its historical average of 16.1x. In both cases, the drawdown in equities and the slowing growth of corporate profitability as exhibited in earnings-pershare (EPS) impacted valuations.
Speaking of Earnings…
According to FactSet, aggregate growth in EPS for U.S. companies is estimated at 4.5% year-over-year for 2022. While this exhibits growth, it is a material slowdown compared to 2021 when EPS grew 51.5% year-overyear. For 2023, analysts are estimating EPS growth of 6.5% year-over-year.
Concerning foreign companies, analysts estimate calendar year 2022 EPS growth of 6.8% year-over-year, materially below 2021’s EPS growth of 52.1% year-overyear. Unlike the growth in EPS estimated for U.S. companies for 2023, EPS for foreign companies is estimated to grow year-over-year, albeit modestly, at 1.2%.
That said, analysts’ downward revisions continue to outpace upward revisions. While this trend has continued unabated since mid-2022, the pace and degree of change associated with downward revisions has begun to moderate.
First Quarter 2023
While the above presents an annual summation concerning the outlook of corporate earnings, what can we anticipate for first quarter 2023?
According to Refinitiv, analysts surveyed via I/B/E/S project year-over-year revenue growth for the first-quarter of 2023 of 2.6% – almost half of the 4.1% growth estimated for fourth quarter 2022.
Regarding EPS, analysts project yearover- year EPS growth of 1.4% versus the decline of 1.6% estimated for fourth quarter 2022, which is noteworthy as the
first three calendar quarters of 2022 EPS grew 11.4%, 8.4% and 4.4%, respectively.
Equities – A Long-Duration Asset Class
As we began 2022, we posited a theme of “Seeing the Trees through the Forest.” We anticipate 2023 will require similar insight and discernment.
Given the drawdown of 2022, we’re well reminded that equities, as an asset class, bear a characteristic of being long in duration. It may take companies years to attain profitability. Even seasoned companies who appear nimble in their ability to change to maintain relevance and address the continual dynamism associated with “end demand” may, at times, exhibit a moderation or slowing in earnings growth. Companies that appear “cheap” may be cheap for a reason.
Conversely, the ability to identify companies with sustainable-to-growing revenue and earnings bearing an attractive valuation is the result of a viable, executable process. We believe our continuously executed, disciplined process provides an opportunity for success, specifically within the framework we see going forward.
Source: BTC Capital Management, Ibbotson Associates, FactSet, Refinitiv.
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.
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