The 1% Move Report

Timely commentary on market performance whenever the S&P 500 changes more than 1% in a day.

 

 

 

 

 

Wealth Management — February 24, 2023

Source: Bloomberg and Morgan Stanley Wealth Management Global Investment Office as of 2/24/2023.

What Happened in the Markets?

  • The S&P 500 Index declined 1.1% Friday to 3,970. The index is now up 3.4% year to date. 
  • Eight of the 11 S&P 500 sectors dipped as Materials (+0.7%) and Financials (+0.1%) outperformed while Information Technology (-1.8%) and Real Estate (-1.8%) lagged the index.
  • Stocks traded lower into the weekend as core PCE inflation came in higher than consensus estimates. This PCE print continues a recent string of upside surprises in both job market and inflation data, which has caused interest rates to continue higher. In fact, fixed income markets are now pricing a Fed Funds terminal rate of 5.4%, up from 4.9% at the beginning of the month. 
  • Next week, markets will shift attention to various gauges of consumer sentiment as well as the ISM Manufacturing and Services Indices for the month of February.  
  • As of the 4pm equity market close, WTI oil increased to nearly $77 per barrel. Treasury yields rose across the curve, with the 10-year Treasury yield up to 3.95%. 

Looking Ahead

S&P 500 Price vs 50, 100, 200 Daily Moving Averages

Source: Bloomberg and Morgan Stanley Wealth Management GIO. Data as of February 24, 2023.
  • 4Q22 Earnings: As of the market close, 468 S&P 500 companies reported fourth quarter results with 68% of them beating earnings expectations. In aggregate, for the companies that reported, earnings surprised to the upside by 1.6% while sales surprised by 2.0%, according to Bloomberg. Both of these metrics are below the long-term averages for earnings and sales beat rates. For the S&P 500, the blended earnings growth on a YoY basis is -4.8% for 4Q22, according to FactSet. The MS & Co. US Equity Strategy team believes that earnings estimates have meaningful downside in the months ahead. 

The Global Investment Committee’s Outlook

Source: Morgan Stanley Wealth Management Global Investment Office as of December 8, 2022.

With the Fed responding to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution remains intact. Corporate earnings revisions moved lower over the course of 2022, suggesting downside to forward earnings growth. We recommend investors focus on risk management through quality cash flows, defensiveness, and attention to stock-specific valuations. We suggest rebalancing portfolios and tax-loss harvesting during bear market rallies. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital, given the potential for higher yields amid ongoing inflation. This requires diversified and active exposure, with our preference for core investment grade fixed income and dividend-paying stocks. Consider revisiting positioning in long-duration/growth equities, where there may not be adequate compensation for the risks of higher real rates, falling operating leverage and the strong US dollar. 

For US equities, the MS & Co. US Equity Strategy team sees the potential for further equity downside in the early part of 2023, given their base-case expectations of $195 for 2023E earnings, well below current consensus levels. Their 2023E S&P 500 base case provides a target of 3,900, based on 2024E earnings of $241. This scenario assumes that nominal top-line growth slows to the low single digits and that margins contract. Their 2023E bear case of 3,500 considers a severe earnings recession, margin pressure and a contraction of EPS growth. Their 2023E bull case of 4,200 corresponds to a mid-single-digit top-line growth rate and limited margin compression. This bull case forecast embeds an estimate of 16.7x MS & Co.'s forward 2024E earnings of $251. 

Market data provided by Bloomberg.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that circulate widely outside the US.

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