| | | Market Snapshot
briefing.com
| Dow | 33880.04 | -45.92 | (-0.14%) | | Nasdaq | 11896.96 | -110.01 | (-0.92%) | | SP 500 | 4111.67 | -24.81 | (-0.60%) | | 10-yr Note | -30/32 | 3.63 |
|
| | NYSE | Adv 785 | Dec 2331 | Vol 853 mln | | Nasdaq | Adv 1535 | Dec 3016 | Vol 5.45 bln |
Industry Watch
| Strong: Utilities, Consumer Staples |
| | Weak: Materials, Information Technology, Communication Services |
Moving the Market
-- Concerns about Fed's path forward after stronger than expected jobs report on Friday
-- Geopolitical angst following reports that the U.S. shot down a suspected Chinese spy balloon
-- Valuation concerns
| Closing Summary
06-Feb-23 16:20 ET
Dow -34.99 at 33890.97, Nasdaq -119.50 at 11887.47, S&P -25.40 at 4111.08
[BRIEFING.COM] The stock market traded in an uninspired manner Monday as it fell prone to continued selling interest on the heels of Friday's much stronger than expected January employment report.
The indices started the session in a southerly direction, and while they rebounded from their early lows that saw the S&P 500 slip below 4,100, they could never sustain any upward momentum. Instead, they spent much of the day moving laterally in a relatively tight trading range below their flatlines. The Dow Jones Industrial Average briefly scooted above its flatline in late afternoon trading before fading again into negative territory.
Monday's session was a day of consolidation for the market following its big run to begin the year. There wasn't a great deal of conviction on the sell side or the buy side, yet the selling interest prevailed in the midst of rising Treasury yields, festering valuation concerns, and some increased geopolitical tension after the U.S. shot down China's suspected spy balloon off the South Carolina coast on Saturday.
The 2-yr note yield jumped 17 basis points to 4.46% and the 10-yr note yield rose 10 basis points to 3.63%. In turn, the U.S. Dollar Index jumped 0.7% to 103.61.
Those moves reflected some budding angst that the January employment report will give the Fed more room to raise rates and to keep rates higher for longer. This sentiment was also evident in the fed funds futures market, which is now pricing in a 73.7% probability of a third, 25-basis point rate increase at the May FOMC meeting, according to the CME FedWatch Tool, versus only a 30% probability last Thursday (i.e., the day before the employment report).
Notably, market participants will hear from Fed Chair Powell on Tuesday when he has a "Conversation with David Rubinstein" before the Economic Club of Washington D.C., at 12:40 p.m. ET. The specter of that event presumably kept the market under wraps today as well.
The bump in market rates, though, has bumped the stock market off its bullish rails, although there was another speculative flurry seen in the AI stock space, as well as in so-called meme stocks like Bed Bath & Beyond (BBBY 5.86, +2.81, +92.1%), which alone saw approximately 240 million shares traded today.
The eye-popping price action today, though, was reserved mostly for story stocks. Catalent (CTLT 66.96, +10.91, +19.5%) was one of those stories after Bloomberg reported that it has caught Danaher's (DHR 263.66, -6.19, -2.3%) eye as a takeover target.
Otherwise, today's moves were relatively modest in scope at the sector and index level.
The communication services (-1.3%), information technology (-1.2%), and materials (-1.1%) sectors were today's biggest losers. The lone sectors to end the day in positive territory were utilities (+0.9%) and consumer staples (+0.02%).
Growth stocks and value stocks alike languished during today's trade. The Russell 3000 Growth Index fell 0.8% and the Russell 3000 Value Index dropped 0.7%.
Decliners led advancers by a 3-to-1 margin at the NYSE and by a 2-to-1 margin at the Nasdaq.
- Nasdaq Composite: +13.6% YTD
- Russell 2000: +11.2% YTD
- S&P Midcap 400: +10.2% YTD
- S&P 500: +7.1% YTD
- Dow Jones Industrial Average: +2.2% YTD
There was no U.S. economic data of note today.
Tuesday will feature the December Trade Balance Report at 8:30 a.m. ET (Briefing.com consensus -$68.5B; prior -$61.5B) and the December Consumer Credit Report at 3:00 p.m. ET (Briefing.com consensus $24.5B; prior $27.9 bln).
Notable companies reporting earnings before Tuesday's open include BP (BP), Carrier Global (CARR), Centene (CNC), DuPont (DD), Fiserv (FISV), Hertz Global (HTZ), and Royal Caribbean (RCL.
Stuck below the flatline
06-Feb-23 15:30 ET
Dow -88.66 at 33837.30, Nasdaq -142.40 at 11864.57, S&P -32.10 at 4104.38
[BRIEFING.COM] The trading day is nearing its conclusion, yet the major indices are not nearing positive territory. They remain stuck below the flatline, which is where they have been stuck all day. The one exception is the Dow Jones Industrial Average, which managed a foray above the flatline a little more than an hour ago.
Today's outsized moves have been reserved for individual stocks, but tomorrow could feature more of a trading impulse for the indices knowing that Fed Chair Powell will have some things to say/answer during his "Conversation with David Rubenstein" at 12:40 p.m. ET.
Treasury yields settled their session, with the 2-yr note yield hitting 4.46% and the 10-yr note yield hitting 3.63%, which was at or near their highs for the day.
Heading into the home stretch, the only S&P 500 sector in positive territory is utilities (+0.5%).
Featured earnings reporters before tomorrow's open include BP (BP 34.60, -0.55, -1.6%), Carrier Global (CARR 46.23, -0.66, -1.4%), Centene (CNC 71.21, +0.19, +0.3%), DuPont (DD 72.14, -0.84, -1.2%), Fiserv (FISV 105.91, -0.69, -0.7%), Hertz Global (HTZ 17.50, -0.66, -3.6%), and Royal Caribbean (RCL 68.71, +0.27, +0.4%).
A day of consolidation
06-Feb-23 15:00 ET
Dow -45.92 at 33880.04, Nasdaq -110.01 at 11896.96, S&P -24.81 at 4111.67
[BRIEFING.COM] The major indices have been moving laterally in fairly narrow trading ranges for a good chunk of today's trade. For the S&P 500, which briefly slipped below 4,100 earlier, that range has been 4,105-4,125.
One could rightfully call this a day of consolidation as the price action seems to be bearing that out. There hasn't been much movement at the sector level; and there is a lot of red on stock monitors, yet the losses themselves are relatively modest in scope.
The A-D line has skewed in favor of decliners by a decent margin all day and that remains the case at this juncture.
A smattering of earnings reports before the open included results from Energizer Holdings (ENR 34.96, -2.29, -6.2%), Tyson Foods (TSN 60.81, -3.22, -5.0%), On Semiconductor (ON 80.28, -0.61, -0.8%), and Neurocrine Biosciences (NBIX 105.30, -4.73, -4.3%), all of which missed and/or issued disappointing guidance.
After the close today, Activision Blizzard (ATVI 72.16, -3.08, -4.1%), Pinterest (PINS 27.89, +0.41, +1.5%), Simon Properties (SPG 129.19, -0.62, -0.5%), Skyworks Solutions (SWKS 110.11, -2.37, -2.1%), and Take-Two (TTWO 105.42, -3.86, -3.5%) will be featured reporters.
Extra Space Storage gains on deal sympathy, VF Corp slips ahead of earnings
06-Feb-23 14:30 ET
Dow +1.40 at 33927.36, Nasdaq -82.47 at 11924.50, S&P -18.85 at 4117.63
[BRIEFING.COM] The S&P 500 (-0.46%) is in second place at this point on Monday afternoon; in recent trading, the Dow Jones Industrial Average (flat) has peeked above Friday's close.
S&P 500 constituents Extra Space Storage (EXR 167.96, +4.83, +2.96%), Biogen (BIIB 292.10, +8.47, +2.99%), and Campbell Soup (CPB 52.02, +1.14, +2.24%) dot the top of today's trading. EXR gains in sympathy to today's announced Life Storage (LSI 132.32, +12.74, +11.52%)/Public Storage (PSA 306.96, -1.51, -0.49%) deal, while BIIB gains after the FDA announced it had accepted the NDA for zuranolone, and CPB is among a handful of CPG stocks showing strength today alongside GIS +2.0% and K +1.7%.
Meanwhile, Colorado-based apparel firm VF Corp (VFC 28.86, -1.76, -5.75%) is today's top laggard ahead of tomorrow evening's earnings.
Gold ends higher on Monday
06-Feb-23 14:00 ET
Dow -52.81 at 33873.15, Nasdaq -112.52 at 11894.45, S&P -26.73 at 4109.75
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (-0.94%) holds the lead at the bottom of today's standings.
Gold futures settled $2.90 higher (+0.2%) to $1,879.50/oz, rallying modestly after hitting a multi-week low on Friday.
Meanwhile, the U.S. Dollar Index is up about +0.7% to $103.67.
Page One
Last Updated: 06-Feb-23 09:05 ET | Archive
Valuation concerns creeping in to drive a cooldown phase
The stock market is on track to start today's session with a negative slant, continuing the action seen Friday following the much stronger-than-expected January employment report and ISM Services PMI.
Currently, the S&P 500 futures are down 31 points and are trading 0.8% below fair value, the Nasdaq 100 futures are down 124 points and are trading 0.9% below fair value, and the Dow Jones Industrial Average futures are down 180 points and are trading 0.5% below fair value.
Those indications are improved from earlier but not enough to ensure a start in positive territory for the cash indices.
That's not altogether surprising. Last week was a good week for the stock market, like most weeks have been so far in 2023, yet last week also featured some nonsensical price action in many stocks that revealed a heightened degree of speculation and a stoked a palpable sense of complacency that seems misaligned with a deteriorating earnings backdrop.
As discussed in The Big Picture column posted Friday, the market's valuation at 18.5x forward twelve-month earnings is full, if not rich, knowing that earnings estimates are still declining. To wit: the forward twelve-month EPS estimate stood at $229.30 when the year began and is currently at $225.36, according to FactSet.
Therefore, valuation concerns appear to be creeping in to explain some of this morning's softness, but something else that has crept back into the mix following the employment report is the specter of the Fed having more room to raise rates and to leave them higher for longer.
Last Thursday, the CME FedWatch Tool showed only a 30% probability of a third, 25-basis point rate hike at the May meeting. Today, however, the probability has risen to 70.9%, which is up from 61.8% on Friday.
In turn, the 2-yr note yield, which was at 4.10% last Thursday, is up to 4.42% today.
The bump in Treasury yields, driven by some shifting in rate-hike expectations, is slowing the stock market's upside momentum. Increased geopolitical tension between the U.S. and China, after the U.S. shot down a suspected Chinese spy balloon off the coast of South Carolina over the weekend, has also been cited as a restricting factor this morning.
Still, our intuition tells us that the equity futures would have been leaning negative this morning even if there wasn't a spy balloon incident. That's because market participants know that things are running too hot in the stock market and that many of the stocks that have gone parabolic need to cool down a bit (and perhaps a lot more than a bit).
Life Storage, Inc. (LSI) and Catalent (CTLT), however, are both running hot at the moment. The former received an $11 billion all-stock buyout offer from Public Storage (PSA), whereas the latter has reportedly drawn Danaher's (DHR) takeover interest, according to Bloomberg.
In related M&A news, Newmont Mining (NEM) has confirmed a proposal to combine with Newcrest in a $17 billion deal.
This M&A activity hasn't altered the pre-market disposition for a couple of reasons. First, the deal sizes aren't that significant to be labeled market moving, and, secondly, the market has some good reasons to take a breather.
-- Patrick J. O'Hare, Briefing.com
RH gets a price cut as high-end retailer issues downbeat sales update, announces restatements (RH)
Luxury furniture and home decor company RH (RH) is reclining lower after issuing a downbeat sales update for FY23 (Jan) and announcing the restatement of a few quarterly reports due to errors in the calculation of GAAP net income per share.
- Regarding the former issue, the company is now expecting revenue to come in at the low end of its prior guidance range of (4.5)-(3.5)%, reflecting soft demand for expensive discretionary items and RH's reluctance to discount its furniture in a highly promotional environment.
- RH's decision to avoid entering price wars with other home furnishing companies, like Williams-Sonoma (WSM) or Wayfair (W), is meant to protect its brand name and its margins.
- To that end, RH has had some success as the company also stated that it expects FY23 adjusted operating margin to be towards the high end of its prior guidance range of 21.5-22.0%. However, that would still be well below the 25.6% figure that RH posted in a FY22 that featured record-setting sales driven by COVID-related spending trends, a hot housing market, and a less volatile stock market.
- In 3Q23, adjusted operating margin took a pretty big hit, sliding by 390 bps sequentially to 20.8%, while adjusted gross margin dipped by 310 bps to 49.7%. Based on those data points, it appears that RH did become a little more promotional towards the end of the calendar year, but likely not to the extent of competitors operating in the mid-to-lower tiers of the market.
- This resistance to materially lower its prices is coming at a cost. Specifically, RH is ceding some sales and market share to its competitors, which is apparent in its eroding top-line growth rate. Last quarter, RH's sales fell by nearly 14%, while WSM posted an increase of about 7%.
- RH's CEO Gary Friedman has repeatedly stated that these lower-value market share losses are worth sacrificing in order to avoid longer-term brand erosion. After a dreadful 2022 that saw shares plummet by about 50%, investors may finally be seeing eye-to-eye with Friedman on this perspective as the stock has jumped by nearly 20% in 2023.
- In regard to the restatements, RH noted that its financials for 1Q23, 2Q23, and 3Q23 should no longer be relied upon due to "material unintentional errors." The errors are related to how RH treated pre-tax losses on the extinguishment of debt, which therefore inflated its basic net income per share for these periods. For some perspective on the impact of this error, RH's GAAP net income per share for 1Q23 should have been $7.22, instead of the $12.16 it reported.
- Although this specific restatement doesn't affect RH's non-GAAP EPS, there appears to be more restatements on the way. In the SEC filing, RH also disclosed that it mistakenly used a 0% tax rate to compute non-GAAP EPS, reflecting its expectation for substantial tax benefits arising from stock option exercises by Mr. Friedman.
- However, the company now says that the modified tax rate will be higher than 0%, which will decrease its previously reported non-GAAP EPS. At this point, it's unclear how significant the changes to EPS will be.
Overall, the restatements aren't a major issue from a fundamental perspective, although they don't exactly induce confidence in the company's executive team. Questioning the accuracy of a company's financials is never a comfortable situation for an investor, especially when that company is already contending with some fierce headwinds, as RH's revised sales outlook attests.
Tyson Foods sinks after unfavorable market dynamics clipped profitability in DecQ (TSN)
Tyson Foods' (TSN -4%) widest earnings miss in over a decade in Q1 (Dec) is proving unappetizing today, spurring a sell-off toward 52-week lows. The world's second-largest food processor also fell short of analysts' Q1 revenue expectations. On the bright side, TSN did reiterate its FY23 (Sep) revenue outlook. However, TSN cut its targets for adjusted operating margins across its Beef, Pork, and Chicken segments even as the USDA projected domestic production levels to stay around the same as in Q4 (Sep).
What happened? Prices did not climb as much as in the prior quarter, reflecting disinflation forces within the economy. Total average prices expanded by just 1.7% yr/yr in Q1 compared to a 5.1% jump in Q4. At the same time, total volumes grew just 0.8%, a meaningful slowdown from the 2.1% increase in Q4. This unfavorable combination knocked adjusted operating margins down by 770 bps yr/yr to 3.4%, causing adjusted EPS to plummet by 70.4% to $0.85, while sales grew just 2.5% to $13.26 bln, TSN's lightest sales quarter since 1Q20.
- Drilling deeper, Beef (36% of Q1 sales) experienced accelerated price declines sequentially, slipping 8.5% yr/yr compared to the 8.2% drop last quarter. Volumes were also hit, expanding by just 2.9% compared to the 5.1% increase in Q4. Cattle prices were higher in the quarter as beef herd numbers declined. TSN expected the overall harvest to slow due to these higher prices; however, this has yet to occur.
- These factors pressured margins and are expected to continue weighing on the year's profitability, causing TSN to lower its FY23 adjusted operating margins in Beef to 2-4% from the low end of its long-term range of 5-7%.
- Pork (12%) may have seen prices grow 1.4% yr/yr, a nice reversal from the 1.5% decline last quarter. However, volumes sunk 7.4%, a significant change from the 1.1% decline in Q4. Along with FX impacts, waning domestic pork demand due to rising prices was a major problem.
- TSN is optimistic prices will normalize, but anticipates supply challenges throughout the year as producers navigate herd health issues and elevated input costs, forcing it to slash its FY23 margin outlook for Pork to 0-2% from 2-4%.
- Chicken (32%) saw prices grow just 7.1% yr/yr after an 18.2% climb in Q4. Meanwhile, volumes expanded only 2.5% yr/yr. Demand did not materialize in parts of the market as total protein availability remained high, causing prices to not grow as much as TSN expected.
- Although TSN expects these factors to ease in the back half of the year, margins will remain under pressure, explaining its reduced FY23 outlook of 2-4% from 6-8%.
The main takeaway is that disinflationary forces clipped margins in Q1 and are expected to weigh on profitability throughout FY23. Still, TSN managed to improve volumes in the quarter despite these challenges, its third quarter of sequential volume growth. TSN is also amid an accelerated productivity program, targeting $300-400 mln in savings this year. However, TSN's reduced FY23 operating margin projections across its three primary segments create some uneasiness about the industry this year and may indicate additional turbulence in subsequent quarters.
Cummins heads lower despite a pretty good Q4 report and guidance; Meritor off to a good start (CMI)
Cummins (CMI -1%) is ticking lower despite closing out FY22 on a pretty decent note. EPS was in-line while CMI reported decent revenue upside. Probably the highlight was the FY23 revenue guidance of +12-17%, which was above analyst expectations. Of note, this was the first full quarter since the Meritor acquisition closed on August 3 and the results look pretty good.
- Normally, an in-line EPS result is not great, but after a sizeable miss in Q3, we think investors are fine with an in-line result. Also, the revenue guidance was reassuring. Of note, it includes the Meritor business for 2023, but excludes any costs or benefits associated with the planned separation of the Filtration business.
- Engine segment sales rose 9% yr/yr to $2.6 bln thanks to strong demand in the North American truck market, pricing actions and strong aftermarket demand. Off-highway revenue decreased 1% driven by a slowdown in China construction. Distribution segment sales rose a healthy 13% to $2.3 bln, driven by increased demand for parts, service, and whole goods. Components segment sales also rose a healthy 13% to $3.1 bln with strong growth in North America.
- Cummins did note a Q4 market slowdown in China, as well as Russia, where operations have been suspended indefinitely. However, that was pretty much expected with the COVID lockdowns. Looking ahead, Cummins expects demand will remain strong in 2023 in most of its key regions and markets, especially in the first half of the year. The company also says it is monitoring global economic indicators closely and is prepared should economic momentum slow further.
- Circling back to the Meritor deal, Cummins is not generally too active on the M&A front but we did like this deal. The fit makes a lot of sense as CMI is a supplier of engines for trucks, buses, RVs while Meritor is an industry leader in axles and brakes for commercial vehicles. OEMs tend to prefer to interact with a single vendor, so now Cummins can provide more of an end-to-end offering. Also, Meritor has good exposure in the expanding EV market and this will increase CMI's presence in EVs.
Overall, this was a pretty good result for Cummins, especially the FY23 guidance and commentary. Perhaps, management being bullish about 1H23 and perhaps a bit more uncertain about 2H23 is weighing on the stock a bit today. Also, the stock has made a pretty big run recently (+16% since mid-October to new 52-week highs), so we are not surprised to see a little bit of a pullback today.
Qualcomm still hurt by elevated inventory and soft handset demand, but a bottom is in sight (QCOM)
A steep slowdown in demand for smartphones and IoT devices continued to weigh on chip company Qualcomm (QCOM) in 1Q23 as reflected in its revenue miss, but an optimistic outlook for 2H23 is pushing investors to look beyond its current troubles. Those troubles are indeed significant, though, as the company wades through an elevated inventory situation among OEMs due to sluggish consumer demand and the easing of supply chain disruptions.
- Recall that last quarter, QCOM issued a very bleak outlook for Q1 that badly missed EPS and revenue estimates. That gloomy forecast was partly a function of a deteriorating handset market, which prompted QCOM to lower its 2022 3G/4G/5G handset volume projection to a low double-digit decline from its prior outlook of a mid-single-digit decline.
- Last night, the weakness in the smartphone market was on full display when Apple (AAPL) -- which uses QCOM's modem chips -- reported a disappointing 1Q23 earnings report that was driven by an iPhone sales miss.
- Making matters worse, several end markets within the IoT space are also experiencing weaker-than-expected demand, worsening the channel inventory situation. Consequently, QCOM's near term outlook hasn't improved much as the company's Q2 EPS and revenue guidance were below expectations at the midpoint of their respective ranges. To add some context, even if Q2 revenue comes in at the high end of the $8.7-$9.5 bln estimated range, that would equate to a yr/yr decline of 14% -- QCOM's worst decline since 4Q19.
Based on QCOM's poor Q1 results and discouraging Q2 outlook, it may seem surprising that the stock is trading higher today. We believe there are a few reasons for its relative strength.
- First, the worst of the inventory related headwinds may pass this quarter. QCOM is anticipating a sequential decline in IoT revenue for Q2, following growth of 7% in Q1, but the tide may begin to turn thereafter. During the earnings call, CEO Cristiano Amon commented that he's optimistic that demand and channel inventory will normalize in 2H23.
- Second, like many other tech companies, QCOM is stepping up its cost-cutting initiatives. More specifically, further spending reductions and the streamlining of operations will reduce operating expenses by about 5% compared to the run rate exiting FY22.
- Lastly, QCOM's diversification efforts are paying off and should ultimately result in stronger growth. A key component of Amon's strategy is to lessen QCOM's dependence on the smartphone market and the company is having some success in that endeavor. In particular, QCOM's entrance into the automotive market with its Snapdragon digital chassis is becoming a potential game-changer. In Q1, automotive revenue jumped by 58%, matching last quarter's growth. With a design win pipeline of over $30 bln, QCOM is just scratching the surface of this opportunity.
Overall, the quarter shook out as expected with high inventory levels and soft handset demand weighing on QCOM's results and guidance. Despite the lackluster report, the stock is holding up quite well as investors pin their hopes on a turnaround later this year.
Starbucks' recent run ground to a halt as weakness in China weighs on DecQ results (SBUX)
Starbucks' (SBUX -3%) recent run ground to a halt today after the global coffee retailer missed earnings and sales expectations in Q1 (Dec). SBUX's second-largest market, China, which comprised roughly 9% of FY22 (Sep) revs, was a considerable drag on financial performance in the quarter. Comps in the region took a 29% spill, with comparable transactions tumbling 28% yr/yr and average ticket slipping by 1%.
SBUX expects challenges in China to persist but is already seeing signs of a recovery. However, management conceded that it is difficult to nail down the timing, leading to only reaffirming its FY23 (Sep) guidance.
- The headwinds in China took their toll on Q1 numbers, slicing $0.06 off of EPS, causing SBUX to post earnings of $0.75, just missing analyst estimates. Meanwhile, sales grew 8.2% yr/yr to $8.71 bln, less than the market anticipated, on global comp growth of +5%.
- The leading factor behind China's weak performance in Q1 was the easing of COVID-19 restrictions, which drove a wave of COVID-19 cases, resulting in comps coming in four times worse than SBUX expected. It also represented worsening conditions relative to Q4 (Sep), when comps fell just 16%.
- Furthermore, whereas management was optimistic that the massive jump from a -44% comp in Q3 (Jun) to just a -16% comp in Q4 underscored a swift recovery as early as Q2 (Mar), it now does not have clear insight into when a rebound may occur.
- Still, SBUX noted that it is hopeful a recovery will begin in the back half of FY23, citing patterns of post-COVID behaviors in other countries as evidence.
Outside of China, SBUX's Q1 results shined. For example, in North America, SBUX's largest market by far at over 72% of FY22 sales, the company saw a sequential acceleration of its record demand in Q4, delivering +10% comp growth. Active Starbucks Rewards membership in the U.S. grew 15% yr/yr and 6% sequentially to over 30 mln, a significant milestone as members drove a record 56% of tender, up 3% yr/yr, underpinning higher customer engagement. A similar story took hold internationally, as comps climbed +11%, fueled by a recovery in Japan and tourism activity rebounding in EMEA.
Bottom line, if not for COVID-related disruptions in China, SBUX would have brewed much more compelling results in Q1. Although there is uncertainty about when China will recover, the good news is that it is at least a matter of "when." Once China bounces back, SBUX should see a significant boost in its quarterly performance. The company has been pouring time and money into enhancing the flexibility and efficiency of its stores in China, giving it a much stronger footing to experience accelerating revenue growth once the region rebounds. Management has already seen this pattern play out in markets worldwide, including the U.S.
The Big Picture
Last Updated: 03-Feb-23 15:36 ET | Archive
2023 is not 2020 and 2021 -- nor should it be
We are five weeks into the new year, and we have come a long way -- a really long way. As of this writing, the S&P 500 is up 8.8% for the year, leaving it in close proximity to its average annualized return of 9.4% over the last 50 years.
As discussed last week, the market has made its run at the same time earnings estimates have been coming down. The result is what is known as multiple expansion.
The S&P 500, which started the year at 16.7x forward twelve-month earnings, now trades at 18.5x forward twelve-month earnings versus a 10-year historical average of 17.2x.
After a huge week of news and some scintillating price action that, in many cases, defied reason, we thought it would be instructive to take stock of where things stand on the valuation front.
Valuation Snapshot
Below are charts for the 11 S&P 500 sectors, showing how they stack up against their 10-year historical averages and where they stand currently relative to the S&P 500 multiple.
- Trades at 17.4x forward twelve-month earnings. Hit peak multiple of 25.4x in September 2020.
- Sector trades at 6% discount to S&P 500 and 8% discount to historical average.
- Trades at 26.4x forward twelve-month earnings. Hit peak multiple of 54x in July 2020.
- Tesla and Amazon.com are constituents in this sector and disproportionately account for premium multiple.
- Sector trades at 43% premium to S&P 500 and 9% premium to historical average.
- Trades at 20.5x forward twelve-month earnings. Hit peak multiple of 22.6x in April 2022.
- Sector trades at 11% premium to S&P 500 and 6% premium to 10-yr historical average.
- Trades at 10.1x forward twelve-month earnings.
- Gap in chart is intentional to improve readability by removing period in 2020 when sector earnings were negative.
- Sector trades at 45% discount to S&P 500 and 47% discount to 10-yr historical average.
- Trades at 12.9x forward twelve-month earnings. Saw peak multiple of 16.9x in June 2020.
- Sector trades at 30% discount to S&P 500 and roughly in-line with 10-yr historical average.
- Trades at 17.7x forward twelve-month earnings. Saw peak multiple of 18.2x in January 2018.
- Sector trades at 4% discount to S&P 500 and 7% premium to 10-yr historical average.
- Trades at 19.3x forward twelve-month earnings. Saw peak multiple of 27.8x in August 2020.
- Sector trades at 4% premium to S&P 500 and 10% premium to 10-yr historical average.
- Trades at 23.4x forward twelve-month earnings. Saw peak multiple of 28.6x in December 2021.
- Sector trades at 26% premium to S&P 500 and 27% premium to 10-yr historical average.
- Sector trades at 17.5x forward twelve-month earnings. Saw peak multiple of 23.1x in June 2020.
- Sector trades at 5% discount to S&P 500 and 8% premium to 10-yr historical average.
- Trades at 18.7x forward twelve-month earnings. Saw peak multiple of 24.3x in December 2021.
- Sector trades roughly in-line with S&P 500 and 10-yr historical average.
- Trades at 18.3x forward twelve-month earnings. Saw peak multiple of 21.5x in April 2022.
- Sector trades roughly in-line with S&P 500 and at 6% premium to 10-yr historical average.
What It All Means
The stock market can go through some fantastic periods where it looks as if valuations don't matter. That was the experience for much of 2020 and 2021 as fiscal and monetary stimulus did the driving along with the persistence of ultra-low interest rates.
That dynamic shifted in 2022, however, as the interest rate dynamic abruptly shifted, reining in animal spirits and many stocks trading at nosebleed valuations. To a large extent, the charts above show that valuations ultimately matter and that there is reversion to the mean following periods of excess and misery.
That leads us to the final chart, which shows much the same.
Thanks to the rally in stock prices in the first five weeks of the year, as well as the run in Tesla and Amazon.com specifically, the S&P 500 is now trading at an 8% premium to its 10-yr historical average. We have heard some pundits suggest it could get as high as 20x on the multiple expansion. That would put the S&P 500 around 4,500 based on the current forward 12-month EPS estimate of $225.97, according to FactSet, which is down from $226.59 last week.
Conversely, we have heard others suggest 3,000, or roughly 13x the current forward 12-month EPS estimate, is an eventual target zone for the S&P 500 before this bear market finds its bottom.
That is a big gap between the two, but anything is possible when the market sees momentum on its side -- both upside and downside. Thus far, the momentum has been entirely to the upside in 2023 as market participants have cheered the prospect of the Fed being done soon raising interest rates while pressing their bets for a rate cut before the end of the year.
That momentum, however, has the market trading at a full, if not rich, valuation at a time when valuations should matter against a backdrop of declining earnings estimates. Diverting further from the mean strikes us as something that would be fantastic and excessive, which is oh-so 2020 and 2021 but not warranted in 2023.
-- Patrick J. O'Hare, Briefing.com
|
|
