QVML - S&P 500 Earnings / The U.S. Economy Just Won't 'Break'

2023-03-06 04:15:00 ET

Summary

• The Q4 2023 S&P 500 EPS growth is still reflecting 10% y.y, and it has not been revised down even though Q1 and Q2 ’23 EPS estimates continue to be revised lower.
• The Friday, March 10th, 2023 nonfarm payroll report is expecting +210,000 “net new jobs” to be created in the month of February ’23, down from the white-hot January ’23 number of +517,000.
• The January ’23 jobs number and the higher-than-expected inflation data certainly threw a wet blanket on market expectations the last two weeks, but it really hasn’t hurt YTD returns.

IBES data by Refinitiv will start to publish quarterly bottom-up EPS estimates for the year 2024 after April 2 '23. The thought process appears to be that until Q4 '22 S&P 500 earnings are complete, which they are with 98% of the S&P 500 components having already reported their Q4 '22, nothing for 2024 is published except the “annual” EPS estimate, but I get it.

The 4th quarter of 2023 S&P 500 EPS growth is still reflecting 10% y.y, and it has not been revised down even though Q1 and Q2 ’23 EPS estimates continue to be revised lower. So, like Bill Murray in Caddyshack, at least we’ve got that going for us.

YTD returns as of 3/3/23

Judging from the headlines, you’d be hard-pressed to guess these are the 2023 YTD returns for these indices (per Briefing.com) as of 3/3/23:

• Nasdaq Composite: +11.7% YTD
• Russell 2000: +9.5% YTD
• S&P Midcap 400: +9.0% YTD
• S&P 500: +5.4% YTD
• Dow Jones Industrial Average: +0.7% YTD

Listening to CNBC and Bloomberg want to make you slit your wrists, but they do serve the very useful purpose of scaring the crap out of retail investors and turning sentiment very bearish. They don’t call it the “fat box” for nothing...

Late in 2022, I think I wrote on one of the weekend pieces that it wouldn’t be surprising if we saw a monthly nonfarm payroll number that was surprisingly weak. The thought was that - after 4 Fed funds rate increase of 75 bps - and those increases were preceded by a 25 and 50 bp increase, that the typical 6- to 9-month monetary lag would finally start to show up in Q1 ’23.

Not only was the prognostication wrong, but you might say the prediction was spectacularly wrong with the January ’23 job print of 517,000 net new jobs created, although there are still two job reports left in Q1 ’23.

That will teach us to predict.

S&P 500 data:

• The forward 4-quarter continues its slow slide to $221.44 this week from last week’s $221.71;
• The P/E ratio at this week’s close was 18.2 versus last week’s 17.9;
• The S&P 500 earnings yield this week was ended at 5.47% versus last week’s 5.58%.

Summary / conclusion

The Friday, March 10th, 2023 nonfarm payroll report is expecting +210,000 “net new jobs” to be created in the month of February ’23, down from the white-hot January ’23 number of +517,000. Some think the warm Midwest winter helped the construction industry and other service businesses maintain the job growth. Average hourly earnings is supposed to tick up to +0.4%, versus the +0.3% in January’s release. All of this data is from Briefing.com.

The January ’23 jobs number and the higher-than-expected inflation data certainly threw a wet blanket on market expectations the last two weeks, but it really hasn’t hurt YTD returns.

The 60% / 40% balanced portfolio has returned +3.65% YTD.

High yield had a strong week last week, and perhaps coincidentally, it had a strong run the week of the last payroll report or February 3rd, ’23.

Again, if you look at just sentiment, you’d expect the Barclays Aggregate ( AGG ) and the Treasury complex to be down very hard year-to-date given the news on inflation and jobs, yet, as of Friday’s March 3rd, 2023, the AGG is still up +0.60% on the year, while Treasuries - per the Bloomberg data - are -0.60% YTD.

Those numbers just don’t seem as negative as the headlines.

Recently, Walmart ( WMT ), Kroger’s ( KR ) and then last week Costco ( COST ) reported their latest quarterly earnings, and one aspect of inflation I’ve been worried about is grocery inflation. Walmart and Kroger both said while it hasn’t gotten much better the last 2-3 quarters, it hasn’t gotten worse either. Here is a direct quote from the Costco call:

“Now a few comments regarding inflation. It continues to seem to improve somewhat. Recall, back in the fourth fiscal quarter, which ended last August, our estimated year-over-year price inflation was 8% for that prior fiscal year. During Q1, the estimate on a year-over-year basis came down to 6% to 7%. In Q2, we estimate that the equivalent year-over-year inflation number has come down to 5% to 6% range and even a little lower than that towards the end of the quarter, according to the buyers. We continue to see some improvements in many items. Commodity prices are starting to fall not back to pre-COVID levels and some examples but continue to provide some relief with things like chicken, bacon, butter, steel, resin, nuts.”

That’s a plus. Walmart typically guides conservatively, but the Costco comments clearly show a “disinflating” trend, just at a slower rate than many would probably like to see.

Take everything on this blog with a substantial grain of salt. It’s my opinion only, and past performance is no guarantee of future results. Capital markets can change quickly for both the good and the bad.

Thanks for reading.

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