comparing two half full glasses

Glass half full… for now


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Market Ethos
April 17, 2023.

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. 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. About 84% of index members are up over the past month, with a little over half of index members up 5% or more. The TSX is also enjoying a bounce – up 6% over the past month.

Markets hitting the top of this recent range....what next?

There has been some good news to help markets move higher. First, the banking flare up appears to be fading. We’re 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 benefiting others (money center banks).

Just look at JP Morgan’s latest results, with deposits up nicely. Or look at Blackrock that enjoyed strong inflows in Q1 to bond and money market investment vehicles. Contagion or systemic risk does not appear to be an issue.

Second, inflation has improved. 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 fueled multiple expansion for the equity markets. The S&P 500 was trading at 16x in late 2022 and is now valued up 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 that 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 – 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 expansion, 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.

Yields down = multiple expansion, and vice versa
S&P Earnings estimates continue to be revised lower

Final thoughts Future earnings are a bit “squishy”. 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 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.


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Source: Charts are sourced to Bloomberg L.P., Purpose Investments Inc., and Richardson Wealth unless otherwise noted.

*Authors:

Purpose Investments: Craig Basinger, Chief Market Strategist; Derek Benedet, Portfolio Manager

Richardson Wealth:  Andrew Innis, Analyst; Phil Kwon, Head of Portfolio Analytics; Mark Letchumanan, Research; An Nguyen, VP Investment Services

Disclaimers

Richardson Wealth Limited

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.

Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.

Purpose Investments Inc.

Purpose Investments Inc. is a registered securities entity. 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.

Forward Looking Statements

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by the author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. Neither Purpose Investments nor Richardson Wealth warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.  Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

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Richardson Wealth Limited, Member Canadian Investor Protection Fund.
Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.

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