We seem to be fighting the legendary nine-headed Hydra, but with three heads, one of which is inflation, two of stagnation, and the third is “How long can the S&P 500 earnings estimates hold?”
with the Job count on May 22 this morning, almost no one seems to have mentioned that “average hourly earnings” came in at +0.3% vs expected +0.4%.
It’s not likely that energy prices (i.e. crude oil) or food price pressure will ease any time soon, but the expectation is that other components will begin to weaken gradually (at least the Fed governors keep telling us that). The May CPI is due on Friday, June 10, before the opening bell, and the general CPI is expected at +0.7%, while the core CPI is expected to come in at +0.5%, down from the previous +0.6%. . Next week, June 15, is the next meeting of the Federal Open Market Committee, and the expected Fed funds strengthened 50 basis points to the 1.50% range.
The 3800 level on the S&P 500 (actually 3810 was the lowest on May 20) is the 1/3 major retracement level of the S&P 500 according to many good technicians.
Cautious Comments on Apple (AAPL) today by Katy Huberty of Morgan Stanley sent the stock down -3.8%, but it couldn’t even reach average volume. Here’s a quick look at future EPS and revenue estimation reviews for Apple:
Note the reviews from 2022 onwards: it still looks fine. Some of the other FAANG members look a lot worse. There’s not much damage here, though (so far).
S&P 500 data from TWIE and earnings scale card: (IBES data from Refinitiv)
- The forward estimate for the fourth quarter this week jumped back to $235.17 from $233.49 last week.
- Forward estimating P/E ratio was 17.5x vs. 17.8x last week;
- The S&P 500 dividend yield rose to 5.72% this week versus 5.62% last week.
Here’s a portion of the earnings spreadsheet (see the spreadsheet above this sentence) that didn’t show up much: It’s the annual S&P 500 EPS with the quarterly estimates from bottom to top.
Look at Q1 22: Since April 1, 22 or the near start of Q1 earnings 22, the quarterly estimate has risen from bottom to top by 6.5% which is the normal or higher limit for a typical “surprise” factor. The Q2 ’22 didn’t budge at all. It usually doesn’t happen until after July 1, 22.
We (readers/investors) are back in the usual pattern of S&P 500 earnings estimates, and it’s going to be more after the Q222 results come out because it’s going to be the last quarter of total Covid distortion we’ll see. In the second quarter of year 21, S&P 500 EPS grew 96%, while S&P 500 revenue grew 25%. Doubtful, we’ll see the comparison for a while.
Watch Credit Spreads: Credit “risk” rose sharply last week, along with the S&P 500 gaining 6%. It has been difficult to determine this year in the high-yield, high-quality corporate bond space, to what extent the rate decline was related to duration and the amount of credit deterioration expected. With the economic data still staying and S&P 500 earnings flat, you have to assume that a lot of the decline in prices in those cars has been interest rate related. LQD and Bloomberg’s investment grade corporate bond agents started in 2022 with tenures over 9%. This asset class was difficult to own to clients, and we didn’t take credit risk in the short-term high-yield ETF SHYG and the high-yield and short-term municipal funds in Nuveen, but we sold them all that by early April, 22.
In 2007 and 2008, interest rates have been falling, but credit spreads are widening. In 2022, interest rates rise and credit spreads widen as well.
The LQD, AGG, or BOND of Pimco Fund, which is the 50-day downward sloping moving average, was unable to recover. They immediately rebounded from last week, with the average serving as resistance.
Top 12 holding companies as of 5/31/22:
- Schwab Money Market Fund
- BlackRock Strategic Inc Fund: -3.70% YTD
- S&P 500 Equal Weight ETFs (RSP): -8.11% YTD return
- JPMorgan Income Fund: YTD Yield -4.62%
- Microsoft (MSFT): -18.79% YTD return
- Oakmark International: 9.90% YTD return
- Charles Schwab (SCHW): -16.17% YTD yield
- Tesla (TSLA): -28.25% YTD return
- JPMorgan (JPM): -15.23% YTD return
- Merck (Mrk): +21% YTD
- Pfizer (PFE): -8.82% YTD return
- Amazon (AMZN): -28% YTD return
As of May 31, SPY is down -12.79% and AGG is down -8.74%. The benchmark balanced portfolio 60% S&P 500/40% AGG was lower year-to-date by -11.17%.
Summary/Conclusion: There is no doubt that the range of results for many asset class returns for retail investors has increased significantly in 2022, but with the Fed/FOMC considering two consecutive Fed fund rate hikes of 50 basis points on June 15 and then again In July, customers are sitting more. cash than usual. As recession risks grow, clients have been told they are likely to see more outperforming positions under economic duress, with ETFs, funds or securities being added after each price increase.
In terms of how long S&P 500 earnings will last, Apple was a good example today of what someone could do to downgrade a stock in a tough bar. The earnings per share and earnings estimates are still seeing positive revisions, yet the stock is 16% off an all-time high of $180.
There are few places to hide in this dollar market (UUP) As one, gold is flat to 2% higher in 2022, then the money/money markets.
It was difficult to diversify accounts for clients in 2022: at the start of 2022, client accounts had 10% – 12% in either the Oakmark International Fund or the EMXC (Emerging Markets Outside China ETF) both negative since the beginning of the year, with Oakmark Int’ thanks in particular to Ukraine Fundamental and its impact on Europe and EMXC thanks to China’s issues around other emerging markets.
Funds with value even less than the year. Bill Negrin at Oakmark is a great value investor, and as of 5/31/22, his fund is down 8.5% in 2022.
None of this is a recommendation or suggestion to buy or sell. Clients’ properties can change rapidly, and past performance is no guarantee of future results. Capital market conditions can change rapidly. Do your homework and assess your risk appetite for the volatility of the capital markets.
Personally, I don’t think this is a repetition of the events of 2001-2002 or 2007-2008, but the following events would be worrisome either together or separately:
1.) The 10-year Treasury yield traded high at 3.16%, the May 9 high figure;
2.) Crude Oil traded higher above $130-$131 which is the highest since early March 22nd;
3.) The Standard & Poor’s 500 is trading and closing below 3800 on high trading volumes.
Thanks for reading.
Editor’s note: The bulleted summary of this article was selected by searching for the alpha editors.