The S&P 500 rallied 7.5% over the past month from the bottom created by the U.S. banking flare-up. Sure, the mega-cap techs helped more than their share, but overall, it has been a decently broad-based advance. 84% of index members are up over the past month. A little over half of index members are also up 5% or more. The TSX is also enjoying a bounce – up 6% over the past month. It’s been a good month with the S&P and TSX bumping up against the top of a range that has existed for half a year now.
There has been some good news to help markets move higher. Firstly, the banking flare-up appears to be fading. Not implying banks are in the clear, but deposits are on the move in search of vehicles with more attractive yields or safer homes. This is negatively impacting some banks (regionals) and benefitting others (money center banks).
Just look at JP Morgan’s latest results; deposits are up nicely. Or look at Blackrock, which enjoyed strong inflows in Q1 to bond and money market investment vehicles. Contagion or a systemic risk does not appear to be an issue.
Inflation has improved as well. This was the market’s biggest angst in 2022, so continued improvement is good news. And while economic growth has been slowing, it has been gradual at this point. The growth has been just enough for bond yields to come down but not too much to raise the market’s ire over recession risk.
10-year yields in the U.S. have now come down from almost 4.5% to 3.5% and in Canada from 3.5% to 3.0%. If you like the porridge analogy for the economy, the data is cool but not cold.
Less inflation and lower bond yields fuelled multiple expansions for the equity markets. The S&P 500 was trading at 16x in late 2022 and is now valued at 18.5x. Meanwhile, the Nasdaq trading at 21x in late 2022 is now back up to 25x – clearly pricing in a good amount of optimism. While 18.5x may not be ‘expensive,’ don’t forget the ‘E’ in the PE ratio is not proving as resilient these days. We are in the early days of Q1 earnings season, which based on current forecasts, has S&P earnings pegged at just over $50. This was nearly $60 last summer. Subsequent quarterly earnings have not been revised down as much. As each quarter’s earnings season approaches, we would expect downward revisions to accelerate. That has been the norm lately.
The recent high rally in the equity markets is fueled by multiple expansions, thanks to falling inflation and bond yields. However, falling inflation will prove to be a headwind for earnings going forward. And those lower bond yields? Well, they are lower because optimism for economic growth continues to dwindle, which is good for lower yields but not good for future earnings.
Final Thoughts
Future earnings are a bit “squishy.” And with the market enjoying the lift from bank fears cooling, inflation cooling and lower bond yields, could it keep going? Of course. The recent market has been reacting to just about any news as good news: glass half full. And when the Fed finally announces the end of rate hikes, markets may rejoice. However, this advance is being built on a rather shaky foundation. Don’t be afraid to take advantage of this recent bounce and continue pivoting to a defensive position. Or at least be ready to do so in case the market switches to a glass-half-empty mindset.
— Craig Basinger is the Chief Market Strategist at Purpose Investments
Get the latest market insights to your inbox each week.
Sources: Charts are sourced to Bloomberg L. P.
The content of this document is for informational purposes only and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document, and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable; however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are, by their nature, based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.