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US Perspectives: Recent performance remains solid
Jul 26, 2023
- Throughout 2023, US equities have outperformed most major world markets, and the bull market, which began on 12 October 2022, continues. Valuations have risen, but we have seen far richer valuations in prior bull markets
- Through 14 July, the S&P has risen by 26 per cent from its October lows and +17 per cent year-to-date. The Nasdaq Composite has soared almost 38 per cent from its December trough and is up by 35 per cent YTD
- The second-quarter earnings season has just begun. Through Friday, 21 July, only 18 per cent of the companies in the S&P 500 have reported, and only 75 per cent of those companies have reported earnings above estimates. This is below the 5-year average of 77 per cent but above the 10-year average of 73 per cent
- So far, the combination of the actual releases and the earnings forecasts look likely to deliver a decline of 9.0 per cent, compared to the projection of a -7.2 per cent at the beginning of the earnings season. This would represent the largest earnings decline for the S&P 500 since Q2 2020 when the earnings plummeted by 31.6 per cent during the COVID recession
- In the third quarter, analysts are projecting earnings growth of only 0.1 per cent y-o-y, followed by a gain of 7.5 per cent y-o-y in the fourth quarter. In 2024, the FactSet consensus of analysts’ estimates is that earnings will rise 12.9 per cent y-o-y as of 21 July
- From the trough in the equity market last October, S&P multiples have been on an uptrend, and through 21 July, stand at 21x forward earnings. While forward multiples for the S&P 500 have risen, they are nowhere near their historic highs, and the 5x expansion is the historic average for most bull markets. Significantly, as earnings improve in 2024, equity market valuations may continue to expand, providing further upside for equity market returns
- US equity investors have seen solid returns since the October lows. Looking ahead, an improving outlook for corporate earnings, combined with a much-anticipated Fed pause and the potential for lower interest rates next year, should provide attractive fundamentals. However, in the short term, the US economy is forecasted to slow down, which could lead to further downgrades in US corporate earnings. Historically, September has been a tough month for the markets, and we could see some consolidation and sector rotation in the short term. But we still believe longer-term fundamentals remain quite constructive