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09/11/2023 Market Strategy

  • John Stoltzfus
  • September 11, 2023

Keep Expectations Right-Sized

We could see some choppiness near term

Key Takeaways

  • Weakness in equity markets last week as interest rates climbed higher is likely to persist near term as bullishness is relatively high while the Fed remains shy of its inflation target.

  • The Wall Street Journal, citing FactSet data, reported over the weekend that analyst estimates for Q3 earnings point to a 0.5% rise from a year earlier, compared to the 5.8% YoY decline registered for the second quarter season that is almost complete (just one firm left to report).
  • Last week’s ISM survey showed service sector activity rising buoyed by an improving employment outlook, new orders and prices paid. In addition nonfarm productivity growth showed a strong result in Q2.
  • We highlight opportunity in the S&P 500 energy sector.

financials abstract

Last week’s economic data pointed to the resilience in the US economy as well as to some slowing reflecting the efforts of the Federal Reserve to dampen the inflation rate over the course of the last eighteen months.

In our view the resilience reflected in jobs, wages, and consumer and business sentiment indicators reflects our long held view that the Bernanke legacy Fed with Jerome Powell at the helm is highly sensitive to the real effects of its efforts to curb inflation in the US economy.

With inflation still shy of the Fed’s 2% target rate we persist in suggesting that investors curb their enthusiasm for a long rate pause or even a rate cut and instead right size expectations and use market weakness to seek out “babies that get thrown out with the bath water” in periods of volatility that accompanies a normal process of choppiness that comes from exiting periods of crisis and uncertainty in a cyclical “workout.”

In our view even as the Fed appears to be nearing an end to the current rate hike cycle the stickiness evidenced in food, services, energy and other prices warrants the Fed remaining vigilant along with a potential for one more hike this year and perhaps another next year.

What’s bad news for highly leveraged short term players in the market as the Fed remains on the case to curb inflation is good news for longer term investors for whom inflation should be of greater concern. 

Quotation from Aenean Pretium

We find the S&P 500 energy sector looking increasingly attractive as policy makers in the US and abroad strive to contain inflation and manage economic growth.

Fixed Income complementary to stocks

For now the end of “free money” market thematic remains in place. We see a normalization of interest rates as bond issuers pay for the privilege of borrowing money and bond buyers get something in return for buying bonds via the coupons as conducive to finding prudent opportunities for diversification across the asset classes of stocks and bonds.

Earnings Winding Up and Q3 Looking Stronger

With just one company left to report Q2 results among the 498 companies in the S&P 500 earnings growth fell 5.8% in the period on back of 1% revenue growth. Results were overall better than expected in Q2 with just three sectors posting negative earnings growth: energy, materials and health care were off 52%, 29.3% and 27.4% respectively as of last Friday.

The other eight sectors of the S&P 500 showed positive earnings growth with two of the eight (consumer discretionary and communications services) showing respective growth of 35.2% and 13.8% in the period. (See page 8 of this report for detail in our earnings score card).

The Wall Street Journal this weekend, citing FactSet data, reported that analyst estimates for Q3 earnings point to a 0.5% rise from a year earlier, compared to the 5.8% YoY decline registered for the June quarter. Earnings reporting season for Q3 should begin in mid-October. v

Lagging Sector gains interest on higher oil prices

Oil prices pushed higher last week as traders weighed the effects of OPEC+ production cuts and the possibility that China’s policy makers might find solutions to boost domestic economic growth and remedy that country’s property crisis. Lack of a resolution to the situation in Ukraine remains a source of upside oil price risk as well.

We find the S&P 500 energy sector looking increasingly attractive as policy makers in the US and abroad strive to contain inflation and manage economic growth.

The US economy has shown persistent resilience midst the Fed’s current rate hike cycle. We believe that prospects are looking better that the Fed’s success thus far in bringing down the rate of inflation could lead to a pause next year, thus lessening pressures on economic growth. Thus far the S&P 500 energy sector ETF has gained 5.2% (for a total return of 7.3%) year to date through last Friday versus a 9% increase in the price of West Texas Intermediate light crude oil.

Improved economic growth along with fiscal stimulus from investment in stateside infrastructure projects and stateside chip manufacturing efforts could contribute to profitability in the energy complex into 2024.

John Stoltzfus headshot

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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