Today in the podcast, updated thoughts on our outlook for the US equity market as well as what’s coming up in 3Q22 reporting season.
well below consensus, taking:
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Now, the details.
EPS forecasts, taking:
• Generally, we are baking in a weak GDP backdrop through the end of 2023 with the most acute pressures seen in 4Q22 and 1Q23. We also have headline inflation ramping down to just under 3% by year-end 2023, moderating commodity prices, a significant step-up in interest expense…
• … a meaningful contraction in operating margins, and little benefit from share buybacks.
• This as mostly a housekeeping move, updating our model for changes in macro assumptions like GDP, CPI, and commodities.
• We’ve been well below consensus since July when we made much bigger cuts to our numbers.
for:
Moving on to Takeaway #2: we are cutting our year-end 2022 S&P 500 forecast to 3,800 (down from 4,200) and issuing a new, preliminary target of 4,100 for year-end 2023.
ow the stock market traded in:
• Our targets are essentially the average of the outputs from 7 different economic, earnings, sentiment, valuation, political, and cross asset models that we regularly use.
• Importantly, they do bake in the idea that we’ll see Republicans take back at least one chamber in the midterms next month.
end. That plays into our late:
o Thinking ahead to 2023, it’s worth noting that the S&P 500 tends to see gains of 13-14% in years that have a Democratic President and Republican or Split Congress.
• I won’t go through all of the models and back tests the go into our targeting process here. But the one other piece of analysis that we’d call your attention to is our valuation model.
, leveraging data back to the:
Moving on to Takeaway #3: 3Q22 reporting season has gotten off to a rough start in terms of the stats and the tone.
• In terms of the stats for the S&P 500, we’re seeing fewer beats so far for 3Q – a trend already underway in 2Q reporting season….
• …and misses are getting punished hard…
February when companies issue:
• In terms of tone, there’s been a clear deterioration in management tone in survey data on everything from the economic outlook, to demand, capex, and employment…
• … and in our transcript review, we’ve also noticed that commentary on currency headwinds, layoffs, and uncertainty has been on the rise but remains well below past peaks.
• One bit of good news on the data side is that the stock market does tend to bottom well ahead of the end of the downward earnings revision cycle – typically we see the S&P 500 bottom 3-6 months before the downward revision cycle is complete.
• Another bit of good news on the tone –on our transcript tracking analysis commentary on inflation and supply chains and pricing appears to have peaked. That’s very good news from an inflation perspective.
Wrapping up with takeaway #4: Small Caps were the star of the show in 2Q22 reporting season and we’ll be watching to see if this can be repeated.
• The Russell:
• Small Caps also saw more upward revisions to earnings forecasts than Large Caps over the summer, something we hadn’t seen in quite some time. Currency and lower international revenue exposure likely played a role in this.
• Overall, a better earnings profile helped Small Cap performance stabilize relative to Large Cap in recent months. And if Small Caps look like the better choice from an earnings perspective this time around, it could help trigger outperformance in a part of the market that already appears to be fully baking in a recession.
That’s all for now, thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for thoughts on specific sectors from RBC’s team of industry analysts.
