Review the latest Weekly Headings by CIO Larry Adam.
- Supportive dynamics for equities have moderated
- Income-oriented investors are enticed by higher yields
- Record cash on balance sheets may lead to record buybacks
It's National Teacher Appreciation Week! Although, I am sure I am not the only one who thinks that the dedication and patience of those who educate our youngest generation deserve more than just one week of praise and gratitude. In our role as your Investment Strategy team, we view ourselves as life-long students of the financial markets – and we study more subjects than you’d imagine! Formulating our outlook requires reading beyond the headlines, understanding the science of the economy, learning the history of the market, incorporating mathematics as we calculate our forecasts, and hopefully having an art in the way we articulate our views. But today, we will take on one of the many responsibilities of a teacher as we grade the current environment for equity investors.
- Bottom Line – 2022 May Not Be As Easy As ‘ABC’ For Equity Investors | Equity investors had become accustomed to above-average returns. The S&P 500 finished 2021 up 28%, with every sector notching positive performance (a rarity!). This was driven by favorable dynamics such as a rebounding economy, an ultra-accommodative Fed, record low interest rates and robust earnings growth.* Transitioning into this year, these supportive factors have moderated, with the uncertainty surrounding the Fed’s tightening and Russia’s invasion of Ukraine subjecting investors to more volatility year-to-date than the entire year prior. Despite the S&P 500 being down 13% year-to-date, it is still too early to dub this year a failure as upside potential exists.
- Economy: Taking Notes On The Fed’s Outlook | The combination of inflation, the war in Ukraine, and rising interest rates has led to a lowering of growth expectations for 2022 (RJ 2022 GDP Estimate: ~2%). But despite these headwinds, Chair Powell reiterated the strength of the US economy this week, and we agree on the premise that there is still strength in personal consumption and fixed investment. Both factory orders and durable goods orders showed signs of strength this week—indicative of continued capital expenditures and additive consumption in the months ahead. Also bolstering aggregate consumer spending is a strong job market (428k jobs added in April, record job openings), and with more people working and receiving modest bumps in wages, spending as we reopen the economy should remain robust.*
- Earnings: Not Quite The Valedictorian | Q1 earnings growth has slowed but still has the potential to reach double-digits (currently +9%).* The percentages of companies beating estimates on the top and bottom line remain above the 20-quarter average, and margins are holding steady—which is notable given pricing pressures. If there were any room for improvement, it would be the more docile forward guidance, as some growth expectations have been dampened due to the Ukrainian conflict and lingering supply chain issues. However, this has not stopped full year earnings estimates from rising 2.2% since the start of the year, a stark contrast from the typical average downward revision of ~3% at this juncture.
- Valuations: Making The Grade | For longer-term investors, fundamentals suggest that the current environment may be an attractive buying opportunity. Since the end of 2019, earnings growth has far outpaced price growth (40.9% versus 27.9%), and the next twelve-month P/E multiple has subsequently fallen to the lowest level since the pandemic began. However, there may be an exception for income-oriented investors as higher yields provide more competition for equities—the 10-year Treasury yield (at ~3.1%) now exceeds the dividend yield of the S&P 500 (~1.6%) by 150 bps.*
- Corporate Activity: The Teacher’s Pet | After a record-setting 2021, US companies are on pace to buyback a historic $1 trillion of stock this year. And with record cash on their balance sheets, many companies have announced new repurchase programs or accelerated previous plans during the recent volatility. Other firms have decided to increase their dividends. In fact, dividend growth for the S&P 500 is forecasted at 7.5% this year – the second-best growth rate since 2014.
- Seasonality: Hoping To Avoid A Copycat | Despite the recent selloff, this bull market is still relatively young. If history proves prescient, returns may be more muted in the months ahead, especially as we move into the third year of the bull market (which began this past March) that traditionally sees more volatility and muted performance relative to the first two years. In addition, the beginning of a Fed hiking cycle and the impending midterm elections have historically accompanied increased volatility and more muted gains. However, neither dynamic has typically brought an end to the equity bull market. Finally, the next six months (May through October) is historically the weakest six-month period for the S&P 500.* While we hope that the current equity market can defy these trends to the upside, history is not on its side.
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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.