Stocks Commentary

Stocks: Merit To Both Bull And Bear Arguments

May 2023

The S&P 500 went virtually nowhere for the first three weeks in April but closed out the month with a 1.2% loss as economic data, earnings season, and debt ceiling worries gave both bulls and bears plenty to chew on. Those optimistic on the near-term path for stocks tend to point toward some mix of better than feared quarterly earnings releases, corporate credit remaining well-bid, and the prospect of a Fed pause as a reason to remain constructive on stocks. However, bears have an equally compelling laundry list of reasons to support their stance that a defensive posture remains justified. S&P 500 earnings estimates continue to be revised lower and may have additional downside, while the S&P 500 trades at a historically ‘rich’ 19X expected 2023 earnings and lending standards are expected to tighten further, thus limiting credit availability. All while monetary policy tightening over the prior year has yet to fully flow through the U.S. economy.

Bulls have ruled the day thus far in 2023, but gains have been driven largely by communication services and information technology behemoths such as Apple, Meta Platforms (Facebook), Microsoft, Netflix, and Nvidia, among others, all laggards in 2022. April was, for lack of a better term, rudderless, with the S&P 500 trading in a wide range while ultimately straying very little from where it started the month, which could embolden both bulls and bears to press their respective positions. Bulls cheer sideways markets that allow stocks to digest gains via time instead of through falling prices/profit-taking, while bears point toward the S&P 500’s inability to break out to a new year-to-date high despite improved investor sentiment and earnings results as an indication that the market is running out of upside catalysts. Both the bull and bear narratives hold some merit, but April’s relative calm is likely to give way to a more volatile and downbeat May due to the battle being waged over the debt ceiling.

Narrow market breadth has been a hallmark of the year-to-date rally, and leadership skewed toward defensive areas such as consumer staples, health care, and utilities during April, which leaves us less enthused about the near-term prospects for stocks. The small-cap Russell 2000 again lagged the S&P 500 and sector relationships serving as a gauge of sentiment and risk appetite such as consumer staples vs. consumer discretionary, are also throwing up caution flags. While these relationships don’t dictate action or portfolio shifts, when taken together they paint a picture of a market with questionable character and one in which complacency shouldn’t be allowed to creep in.

Economic Data, Positive Earnings Revisions Supportive Of Developed Markets Abroad – For Now.

Eurozone equities continued to perform well during April as encouraging economic data (Leading Economic Indicators, Industrial Production, Exports) more than offset concerns surrounding elevated inflation in France, Germany, and the U.K. The MSCI EAFE index ended April higher by 2.9%, and 12.1% year-to-date, propelled by broad-based strength out of Europe as France, Germany, Italy, Spain, and the U.K. have each posted year-to-date gains of 10.5% or more. Notably, while the consensus estimate for full-year 2023 S&P 500 earnings per share has fallen 6% since the end of October, the consensus estimate for 2023 EAFE earnings per share has risen 11.7% over the same time frame, a catalyst serving to improve investor sentiment. Positive economic momentum in the euro zone has led to strong relative performance out of the EAFE over the past two-plus quarters, but inflation remains elevated and with tighter monetary policy and energy insecurity concerns likely to weigh on economic growth and investor risk appetite in the back-half of this year. Investors should temper expectations surrounding euro area equities for the remainder of 2023 as many potential positives catalysts from an economic perspective are already priced in, and great expectations for euro area economic growth could prove unattainable.

China ‘Changing The Narrative’ Could Boost Emerging Markets.

The MSCI Emerging Markets (EM) index fell 0.8% during April as China and Taiwan, which together constitute 45% of the MSCI EM index, each fell 3% or more. China held military drills in the South China Sea during the month, spurring speculation that China would invade and attempt to reunify Taiwan sooner rather than later. While geopolitical tensions tied to China/Taiwan have garnered headlines and weighed on investor sentiment and risk appetite for emerging markets, the more impactful story has been the uninspiring reopening of China’s economy from stringent COVID lockdowns. China’s rebound has left much to be desired, but we wouldn’t underestimate the government’s ability and resolve to stimulate economic growth over coming quarters. While the prospect of China moving on Taiwan cannot be discounted, we suspect tensions will ebb as China re-focuses its energy and efforts on driving economic growth. As China goes, so goes emerging markets and economic optimism could buoy broader EM sentiment near-term. Thus, we remain comfortable with a neutral allocation to emerging market stocks at present.


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