Asset Management
10/16/2023 Market Strategy
October 16, 2023
Happy Days Are Not Yet Here Again
Economic resilience continues with no end to the Fed’s vigilance in sight
Key Takeaways
- With just 32 companies (a little more than 6% of companies) in the S&P 500 having reported Q3 results so far earnings are up 14.2% on back of 8.8% revenue growth.
- Last week the first group of US banks reported results that were better than expected. This week more financial firms as well as a full array of other widely-followed names in other sectors will shed light on how managements are navigating a rising rate environment.
- Last week’s economic data showed core inflation rates falling slowly, but still well above the Fed’s target levels, suggesting that the Fed may not be done raising rates.
On Sunday evening Bloomberg News reported global markets appeared stable as the US and its allies made efforts to contain war in the Middle East. The dollar and other so-called safe haven assets weren’t reflecting much investor concern as markets in Asia prepared to open for the new week.
Last week saw swings across asset prices as traders gauged regional and global economic risk tied to increased geopolitical uncertainties in the aftermath of Hamas’ brutal attack on Israel a week ago.
Stocks, bonds, currencies and gold were among the asset classes that bounced between gains and losses last week as markets navigated the additional level of uncertainty hostilities in the Middle East brings to a global economic landscape already in work-out mode managing the effects of the Russian incursion into Ukraine, tighter monetary policy by central banks to curb stickier than expected levels of inflation, and the process of moving toward a new normal in the post-pandemic world.
This week look for investors to remain focused on the S&P 500’s Q3 earnings season which got unofficially underway last Friday as several of the largest banks in the US reported better than expected results for the period. This week will bring more large and regional bank results to the fore with concerns that some regional banks may face higher hurdles this reporting season. Also reporting this week are widely followed names in industrials, health care, energy, and consumer stocks.
In our view the US economy continues to show enough resilience to help offset what might have been harsher effects from the Federal Reserve’s efforts since last year to contain inflation in the economy.
Earnings off to a Good Start
With just 32 companies (a little more than 6% of companies) in the S&P 500 having reported Q3 results so far, earnings are up 14.2% on back of 8.8% revenue growth.
Six of the seven sectors whose member companies have reported through last Friday showed positive earnings growth from Q3 of 2022 including: consumer discretionary (earnings up 45.6%), financials (+23.5%), industrials (+23.5%), consumer staples (+12.25%) and health care (+11.9%). Information technology lagged the other sectors showing a decline in earnings of 24.8% in the period.
With Q3 earnings season just getting underway and just 32 of the benchmark’s 499 companies having reported results it is much too early to project how the season will pan out. Consensus analyst projections earlier were calling for a 3% decline in earnings for the S&P 500 in Q3.
The Week Ahead
This week’s economic calendar should help shed light via a number of economic gauges including several tracking housing, employment, manufacturing and services.
In our view, the US economy continues to show enough resilience to help offset what might have been harsher effects from the Federal Reserve’s efforts since last year to contain inflation in the economy. Business, labor and the consumer in our view have managed better than many bears and skeptics had expected helping the Fed to remain vigilant towards inflation while remaining sensitive in applying its mandate to the economy.
The Fed Might Not Be Done Yet
In recent weeks comments from a number of Fed officials have signaled that a hard landing may be averted this Fed funds hike cycle. Yields moving up on the mid to longer end of the yield curve suggest that bond market participants are beginning to think the Fed is getting close to the end of hiking rates while still being some distance from cutting rates.
We lean towards the possibility of the Fed raising one more time this year should inflation prove too sticky for comfort.
Based on recent economic data and Fed officials’ comments we believe the Fed might likely take a long “skip” in the first half of 2024 should inflation not prove problematic followed by the likelihood of a rate cut late in the fourth quarter or even in early 2025.
In earlier cycles inflation as we recall often took longer for the Fed to curtail than one might have expected after the central bank had tightened for some time. So far this hike cycle the stickiness of current inflation appears similar to us to those of earlier cycles (1971- 1989).
That said, prior Fed rate hike cycles once well underway counterintuitively often have not been as disruptive to stocks as many might have expected. Business and the consumer can even grow accustomed to higher rates of inflation and find ways to either live with it or work around it so long as they have some degree of confidence that the Fed will ultimately succeed and that inflation will recede and get back under control.
We refer our readers to the table on page 13 of this report that illustrates a period (1971-1989) in which higher inflation, tighter monetary policy and market volatility would have suggested harsher results on S&P 500 performance than was actually realized.
We remind the reader to remember that past performance is no guarantee of future outcomes.
That said we often have found inspiration in the words attributed to the great American author Mark Twain: “History may not repeat itself but it often rhymes.”
Name:
John Stoltzfus
Title: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.
DISCLOSURES
Strategist Certification - The author certifies that this investment strategy report accurately states his/her personal views about the subject securities, which are reflected in the substance of this investment report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this investment strategy report.
The strategy provided in this report is provided by Oppenheimer Asset Management Inc., (“OAM”) a registered investment adviser affiliate of Oppenheimer & Co. Inc. (“OPCO”). It reflects analysis of fundamental, macroeconomic and quantitative data to provide investment analysis with respect to U.S. securities markets. The overview in this report is provided for informational purposes and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security or investment advisory services. The report is not intended to provide personal investment advice. The investments discussed in this report may not be suitable for all investors. Investors should use the analysis provided by this report as one input into formulating an investment opinion and should consult with their Financial Advisor. Additional inputs should include, but are not limited to, the review of other strategy reports generated by OAM, its affiliates, and looking at alternate analyses. Securities and other financial instruments that may be discussed in this report or recommended or sold by OPCO or OAM are not insured by the Federal Deposit Insurance Corporation and are not deposits or obligations of any insured depository institution. Investments involve numerous risks including market risk, counterparty default risk and liquidity risk. Securities and other financial investments at times may be difficult to value or sell. The value of financial instruments may fluctuate, and investors may lose their entire principal investment.
Strategist Certification - The author certifies that this strategy report accurately states his/her personal views about the subject matter reflected in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this strategy report.
Potential Conflicts of Interest: Strategic analysts employed by OAM are compensated from revenues generated by the firm. The strategists authoring this piece also contribute to an OAM managed portfolio product that relies on and trades on the information contained herein. The managed portfolio strategy trades frequently, both ahead of and after the publication of this report. OAM generally prohibits any analyst and any member of his or her household from executing trades in the securities of a company that such analyst covers. Additionally, OAM generally prohibits any analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% (or more) ownership positions in covered companies that are required to be specifically disclosed in this report, OPCO may have a long positon of less than 1% or a short position or deals as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon and makes a market in the securities discussed herein. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.
Third Party Research Disclosure OAM has a research sharing agreement with OPCO pursuant to which OPCO provides OAM Strategy thought pieces to its institutional and retail customers. OPCO does not guarantee that the information in OAM Strategy reports is accurate, complete or timely, nor does OPCO make any warranties with regard to the strategy product or the results obtained from its use. OPCO has no control over or input with respect to opinions found in OAM strategy pieces. OAM is a registered investment adviser affiliate of OPCO.
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation.
Investment Strategy should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2023.