The bottom-up consensus S&P 500 EPS estimate for the next 12 months has started to stabilize and move higher, reversing the weakness that started last June.
No doubt, this is an encouraging sign. And the improvement is fairly broad based with the median next 12-month estimate in the S&P 500 up by 1.2% over the last two months. Only in the energy sector have estimates fallen, on average. The weaker dollar, cost-cutting, stabilization in some end-markets (housing, cloud, digital advertising), the end of margin normalization, and stronger growth in Europe and China have likely all played a role.
That being said, leading indicators of profit growth are still suggesting caution. The Fed’s Senior Loan Officer Opinion Survey (SLOOS) is one of the best indicators, and it is clearly flashing warning signs. Interestingly, in prior soft landings on the heels of Fed rate hikes (1995 and 2019), the banks were not tightening lending standards. Could this time be different? Can a soft landing be achieved with the banks tightening credit availability to such an extent? Only time will tell.
Given the uncertainty, our equity market view is driven by the risk-reward outlook. In a soft landing, we think the S&P 500 could rise to 4,400 by yearend (7% upside). But if the economy slips into a recession, the market could fall to 3,300 (20% downside). Given this asymmetric skew, we have a least preferred view on US and global equities, especially in an environment when fixed income offers a competitive return.
Original report - Inflection point or head fake? 12 May, 2023.
Content is a product of the Chief Investment Office (CIO).
Main contributors: David Lefkowitz, Nadia Lovell, Matthew Tormey