Market Week: September 26, 2022

The week in review

  • Mfg./Services PMI: 51.8/49.2
  • FOMC increased rates by 75bps
  • Housing starts: +12.2% m/m

The week ahead

  • PCE
  • Personal consumption

Thought of the week
As of Friday’s close, large cap equities are down 21.6% YTD. This is more than explained by declining P/E multiples, as earnings expectations themselves have proven relatively robust, despite increasing recession concerns. While wage and input costs have increased rapidly in 2022, analysts’ earnings expectations for 2022 and 2023, shown in the chart below, have only seen marginal declines since the beginning of the year. This relatively mild reaction to recession fears highlights the perceived ability of companies to pass on higher costs to consumers.

Looking ahead, concerns regarding a slowing economy and rising costs have increased; however, 2023 earnings expectations have remained robust, still pointing to 8% yearover-year growth next year. With this in mind, many investors have quite reasonably been concerned that these expectations are still too high, given the rocky macro outlook. As supply and demand normalize, energy prices are expected to fall somewhat from elevated levels, leading to lower profits in the energy sector in 2023. Additionally, declining job growth and fiscal drag could further crimp consumer spending. Rising interest rates will also be a headwind for corporate profits, both by directly increasing the interest expense faced by companies and indirectly by elevating the dollar. These effects would be further amplified of course, if tight monetary policy were to tip the U.S. economy into recession. A more realistic view of the macro outlook suggests that analysts will probably cut their expectations of future earnings some more, partially validating some of the weakness we’ve seen in equity markets so far this year. However, stocks are a long-term investment; and while earnings may face challenges, earnings should recover in 2024 and beyond, supporting a rebound in U.S. equities from today’s depressed levels.

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