09/05/2023 Market Strategy
- September 5, 2023
The Economy and Markets Remain in Work-Out Mode
Resilience remains the operative word even as uncertainty persists
Key Takeaways
- With 99% (496 of 499) of the companies of the S&P 500 having reported Q2 earnings, the results now appear in-line with expectations from early July.
- Earnings are off 5.8% from a year earlier, a bit better than the -6.4% contraction expected at the start of the season. Revenue growth has been minimal (up just 1%).
- Eight of the 11 S&P 500 sectors reported positive earnings growth in Q2.
- Last week’s first glance at economic data for August showed resilience in the employment outlook but continued stickiness in the Fed’s preferred inflation measure. The ISM manufacturing survey showed a small improvement but remains in “contractionary” conditions.
This Labor Day holiday-abridged week will provide market participants and pundits additional economic data points to consider as to the direction the markets will likely take as S&P 500 Q2 earnings season nears a close and the last month of the third quarter gets underway.
A glance under the hood of S&P 500 Q2 earnings season suggests resilience. While the aggregate decline in earnings growth was close to expectations ahead of the start of the season, the drop in earnings growth was centered in three sectors (energy, materials and health), which each experienced double digit declines in the period. The other eight sectors of the S&P 500 posted positive earnings growth.
With the VIX near a 12-month low we wouldn’t be surprised to see at least some choppiness in the near term develop to keep investors on their toes.
September has arrived
Seasonal consideration of September’s reputation as a historically tough month for stocks could see a pickup in volatility should a catalyst appear on the horizon that’s worthy of providing bears and skeptics a chance to take some profits without FOMO (fear of missing out).
And with the VIX near its 12-month low (at a level of 13.2 as of last Friday) we wouldn’t be surprised to see at least some choppiness in the near term develop to keep investors on their toes.
Based on the resilience reflected in recent economic data including that related to jobs, the consumer, business—and the degree of success the Fed has had thus far this Fed fund’s hike cycle—we’d look for turbulence that might develop near term in the equity market as potential opportunity for investors to seek out the proverbial “babies” that can get “tossed out with the bathwater” in market downdrafts.
A big tranche of economic data released last week in our view added to the case for the potential of more strengthening in the economic outlook—if at a moderate pace—as the Federal Reserve remains vigilant against inflation.
Among the developments that in our view point to a continuation of improvements likely still ahead we’d include:
- Resilient employment growth that underscores that things are getting better even as levels of uncertainty clearly remain on the landscape.
- The ability of consumers and businesses to navigate the current Fed Funds’ hike cycle (and relatively high interest rates) remains supportive of the equity market in our view;
- Labor force participation, and hourly wage gains suggest the economy remains resilient even as it slows as the Fed stays vigilant on inflation;
- The Fed’s continued sensitivity to the effects on the economy of its actions to curb inflation;
- In our view this sensitivity reduces the likelihood of the economy experiencing a hard landing
Meanwhile Stay the Course
While inflation remains higher than the Fed’s target, progress made thus far in getting inflation to fall in the direction of its 2% goal suggests to us that investors need to stay the course, exercise prudent diversification, practice patience, and right-size expectations.
Our favorite sectors remain information technology, consumer discretionary and industrials.
We look for the energy sector to garner increasing interest from investors as prospects for sustainable economic expansion in the US become more evident. The “end of free money” in our view is a good thing as bond issuers pay for the privilege of borrowing money and fixed income investors find coupons that offer some return that encourages asset class portfolio diversification.
While much was made by a brace of bears and skeptics of the weakness experienced by stocks in the process of the markets navigating a course through the month of August it should also be noted that the S&P 500 and the Nasdaq Composite ended the month off respectively 1.77% and 2.17%. The same indices on a year to date basis are up respectively 17.61% and 34.06% suggesting to us that near-term weakness could prove further down the road in hindsight to be the pause that refreshes.
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.
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