2023 Weekly Views

Highlights

Earnings season   

The Q3 2023 reporting season unofficially kicks off on 14 July with the big banks, and it will intensify over the second half of July (during which 70% of the S&P 500 are expected to report). As usual, reporting begins with the banks with the consumer corporates bringing up the rear in mid-August. Regarding guidance, the number of companies issuing guidance has risen to 108, the highest number since 2018. Of those companies, the proportion of that guidance that is negative has fallen significantly from its Q1 peak, to 61.1%, the lowest level in the current cycle. However, apart from the industrial sector, across the board the amount of negative guidance issued exceeds the positive. As in the last three quarters, tech takes the lead with the highest absolute number of companies issuing negative guidance (27) followed by discretionary (11). In terms of earnings (EPS), after seven straight quarters of positive EPS growth, profits fell 3.4% y-o-y in Q4 2022 and 1.5% in Q1 2022, translating into the first series of EPS declines since the Covid crisis. Q1 2023 is expected to be worse at -6.4%. But it is also expected to be the bottom, and to mark an inflection point in the EPS cycle (with expectations for Q2 2023 currently still negative, but currently better at -4.1%). Both Q3 and Q4 2023 are still in positive territory with EPS growth projections currently running at 2% and 9.1% respectively. Q1 2023 was also expected to post a negative growth rate of -6.5% before the start of the earnings season. But resilient profits resulted in positive surprise of +5%. The apparent resilience of earnings estimates over the past three months is mainly due to three sectors that have enjoyed positive revisions: industrials, telecoms and technology. These three sectors account for around half of the S&P500 in terms of cap-weighting (45%), and currently overshadow the otherwise lackluster revision picture across the rest of the market. Lastly sales and margins. Sales expectations show sales growth continued to weaken in Q2. If so, this could be the first quarter of negative sales growth in the current cycle: at -0.8% y-o-y in Q2 2023 (coming off 4.4% y-o-y in Q1). The tight labor market, ongoing economic strength and still-elevated inflation in Q2 all support top-line growth. But retail sales have fallen for the fifth quarter in a row and turned negative in May, to the lowest level they have been since March 2020 – a warning signal particularly for top-line growth across the discretionary sectors. Moreover, the disinflation process is expected to keep on throughout H2 2023 which should weigh on sales growth. Margins, as sales are expected to compress due to falling inflation, and EPS is expected rebound as shown above, the risk is that corporates continue to suffer margin compression over the coming quarters. Net margin expectations for Q2 2023 have been trimmed by 80bps since the beginning of the year.

Market update

Conflicting messages

The S&P 500 closed the week at 4,398.95, +0.06% higher. The Dow Jones closed at 33,734.88, -1.14%, with the Nasdaq higher by +0.51%. The volatility index VIX closed the week at 14.83 up from 13.59. The Euro Stoxx 600 slipped -2.61%.

The 10-year UST closed at 4.06% up from 3.84% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -133bps. US Corporate Bond spreads: Investment Grade tightened 4bps at 194bps and High Yield tightened 4bps at 441bps. German 10-year Bunds yield closed at +2.64% up from +2.39% a week before. In Europe, Corporate Investment Grade spreads tightened 5bps at 171bps and High Yield spreads tightened 13bps at 447bps.

The US Dollar Index (DXY) depreciated -0.62% last week and closed at 102.27. The Euro closed at 1.0967 (+0.53%); the Yen appreciated 1.46%, closing at 142.21 and the Swiss Franc appreciated +0.77%, closing at 0.8887. Gold closed at $1,925.05 appreciating +0.30%. Oil was higher, Brent closed at $78.47 (+4.77%) and WTI at $73.86 (+4.56%).

Macroeconomy

US jobs    

The US economy added 209k jobs in June, below the 230k forecast and far short of the ADP number from Thursday of +497k. Private employment gains were just 149k in June, down from +259k in May (and the +259k was revised lower from +283k). It included 21k jobs from leisure/hospitality, substantially lower than what was reflected in ADP. Government was a big driver of employment in June at +60k (up from 47k in May and 38k in April). Employment for April and May was revised down by a cumulative 110k. Employment has grown by a monthly average of 278k over the first 6 months of 2023, lower than the average of ~400k from 2022. The unemployment rate ticked down to 3.6% (in line with consensus and vs. 3.7% from May). The participation rate of 62.6% was unchanged vs. May and in line with consensus. Wages ran a bit hot, coming in at +0.4% m-o-m (vs. consensus +0.3%) and +4.4% y-o-y (up from +4.3% in May and ahead of +4.2% forecast). The workweek was a bit longer at 34.4 hours (above the 34.3 forecast). Payrolls were particularly strong in June. On Thursday, ADP employment report was a blow-out, with 497k jobs created in June (more than double the +225k forecast and compares to +267k in May). Services drove the bulk of the increase (+373k), and within services, leisure/hospitality was the standout (+232k). While jobs growth is robust, wages continue to cool down: job stayers saw a y-o-y pay increase of 6.4%, down from 6.6% in May. For job changers, pay gains slowed for the 12th straight month, to 11.2%, slowest pace of growth since Oct. 2021.

FOMC

The Fed minutes showed a somewhat divided FOMC. The key line which caught the market’s attention was, “almost all participants judged it appropriate or acceptable to maintain the target range for the federal funds rate at 5% to 5.25%, some participants indicated that they favored raising the target range for the federal funds rate 25bps at this meeting or that they could have supported such a proposal”. In general, central banks’ message remains hawkish. The FOMC kept rates unchanged in June, but the dot plot showed a majority of officials see 50bps or more of tightening by year end. ECB raised interest rates by 25bps in June, bringing its deposit rate to 3.5%, while signaling that it has still “more ground to cover”. The Bank of England (BoE) surprised markets by hiking rates by 50bps in June, to 5%, in a “forceful” decision justified by the “material news” in the CPI and wage data. The Swiss National Bank (SNB) increased its policy rate by 25bps. The latest rise brings the SNB’s main policy rate up to 1.75%. Despite inflation figures surprising to the downside for the last few months, comments were rather hawkish about the (medium term) inflation outlook.

US economy

US June ISM services beat expectations, reaching its highest since February: June ISM Services index is up 3.6 points m-o-m to 53.9, beating consensus for 51.0. It was also the sixth-straight month in expansion territory after falling into contraction in December, and the highest print since February. The business activity index is up 7.7 points to 59.2, while the new orders index is up 2.6 points to 55.5. Supplier deliveries index improved again, down 0.1 points to 47.6, while the six-month average reflects the fastest delivery performance since 2009. The prices index is also down 2.1 points to 54.1, while the employment index also turned into expansion territory, up 3.9 points to 53.1.

What to watch

• Monday: China: CPI & PPI (June)
• Tuesday: Germany: ZEW Survey (July); Nato summit begins in Vilnius, Lithuania. Attendees include US president Joe Biden
• Wednesday: SA: CPI (June); Bank of Canada Interest Rate Decision; Reserve Bank of New Zealand Rate Decision 
• Thursday: USA: PPI (June); Bank of Korea Rate Decision; EuroZone: Industrial Production (May)
• Friday: USA: University of Michigan Sentiment (July, preliminary)