Earnings statements in the USA, optimists and pessimists both equally strong, main risks for 2023
Chart of the week
The chart shows the long-term change in earnings per share (EPS, Eranings per Share) of all shares in the S&P 500 Index in the USA (dark blue). The forecast of market participants is entered in light blue. Interest rates have been rising steadily for 20 years, interrupted only by periods of recession.
Why this is important
In the previous recession phases since 1999, profits have declined by at least 15% in each recession. In the recession expected now, profits are expected to fall by only 4%. After that, profits are expected to rise sharply again.
In our view, this is not realistic. The profit expectations for the next quarters are too high.
Currently, the earnings season for the first quarter of 2023 is underway. Last week, banks in the US presented earnings for the first quarter and outlook for the year. Except for Charles Schwab, which slumped 50% at times, there were no negative surprises.
In the current week, it is now the turn of the big tech stocks such as Microsoft and Intel, but also Amazon. These are among the few stocks that are currently supporting the index. Therefore, it will be very exciting to see what figures and what outlook they present.
Optimists and pessimists both equally strong
The economic development in the USA is stagnating. Last Wednesday, the basic documents of the US Federal Reserve were published for the last interest rate decision two weeks ago. This is the so-called "Beige Book". However, the Beige Book does not provide an answer to the question of whether the US economy will slip into recession in the course of the year. While prices continue to rise overall, albeit at a slower pace, the US labor market has so far cooled only slightly. Several scenarios remain possible. A "mild recession" because of the banking crisis, as the Fed staff predicted according to the minutes of the last interest rate decision, or a "soft landing" of the U.S. economy. But a scenario is also possible in which high inflationary pressures remain a problem and the expected further monetary tightening is not enough to move inflation back closer to the 2% target.
Currently, the markets are moving sideways or slightly higher. The optimists and pessimists are in balance.
Arguments of the optimists
The chart shows how many investors have hedged their positions with forward contracts or are speculating on falling stock market prices. Investor hedging is at a new high. If all large investors have hedged their positions, they will not sell. Selling pressure is decreasing massively and even a few positive news can drive the markets up.
In the past 12 years, we have only had a similarly high value three times. In all three cases, prices rose shortly afterwards.
It should be noted, however, that we already had low values in October 2022, which are now being exceeded again.
The chart shows an analysis by Bank of America of how strongly private investors are positioned in cash. We have only had higher amounts of cash in portfolios twice in the past 15 years. In the 2008 financial market crisis and during the COVID crisis. This value also suggests that the markets further we could see the trend reversal upwards soon.
The chart shows a survey of the largest asset managers in the US on how they assess the growth prospects of the economy and how heavily they are weighted in equities. Here, too, we had the lowest value in 23 years in October 2022. After a brief recovery, the value is now collapsing again.
In the past, however, it has usually been worth buying when sentiment reached its lowest point.
It shows the inflation trend in the markets most closely followed by investors. In the USA, inflation is falling slowly but steadily. Pressure on the US Federal Reserve to raise interest rates further is falling. If key interest rates are raised again in May, this is likely to be the last increase in the current cycle.
The graph shows the market breadth. It shows how many shares rise when the index rises. Currently, the upward trend is driven only by a small number of very highly weighted stocks in the index. Although the index is rising slightly, 75% of all stocks in the index are losing value.
The market is currently driven upwards by only 25% of the stocks. Such a low value has not been seen in 15 years. In all cases with such a low market breadth, a correction of 10-15% occurred shortly thereafter.
The chart shows how much interest payments on mortgages have risen in the USA. For 45 years, mortgage payments have been falling for the majority of the time. The sharp increase will cause problems for very many homeowners in the USA. They will have to spend much more on mortgage payments and will have correspondingly less available for consumption.
The picture is similar for credit card debt. There, too, interest costs are rising massively.
Both will put a massive brake on consumption in the USA. A hard recession would be inevitable.
The chart shows the same point as under the heading "Chart of the Week" above. In the last three recessions since 1998, corporate profits in the US (dark blue line) have slumped by 16% to 41%. Currently, a decline of 5-6% is expected.
The chart shows a Bank of America forecasting model based on many leading indicators of economic development. Bank of America is therefore predicting a 16% slump in corporate profits. This is much lower than the current expected value. Investors need to adjust their forecasts to reality.
Arguments of the optimists
This is the same chart used by the optimists. It shows the inflation trend in the markets most closely followed by investors.
In the U.S., even after the biggest and fastest increase in key interest rates, inflation is not falling. It is moving sideways at a high level. In Europe and Japan, inflation continues to rise sharply.
The central banks have lost the battle against inflation. Further sharp rises in interest rates are the result.
The outlook has not been as difficult to assess for a long time as it is at present. We therefore continue to keep the cash portion of our portfolios high and invest in conservative value stocks. If the markets rise, we will be there, but not at the top, and if the markets fall, we can take advantage of the more favorable prices to enter.
Main risks for 2023
The charts show a Bank of America survey of the largest institutional investors worldwide.
When building a portfolio, it's always good to see how and where the very big investors are positioning themselves. Where they see the greatest dangers, they will not place any new money and therefore the chances for further price gains are smallest there.
Here, the investors were asked where they see the highest risks of investing in the last gasps of a hype phase and that the trend will soon change. The investors surveyed assume that if you still invest in this trend now, you will very likely suffer a loss.
In the last month, the picture has changed completely here. No one believes in a further rally in technology stocks. Nor do they believe in continuing to bet on a collapse of the smaller regional banks in the USA.
Here, investors were asked where they see the highest risks in the bond market. The danger has increased massively in the area of commercial real estate. On the one hand, many companies in this sector were financed on too short-term a basis and are now suffering from massively rising financing costs, and on top of this there is the trend toward home offices, which has continued since COVID and is severely curbing demand for more commercial real estate.
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