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US Perspectives: US equities have long-term upside, but short-term issues remain
May 30, 2023
- First-quarter earnings were down -2.2 per cent in Q1 2023, but upward revisions pushed earnings up, and the decline was not as severe as expected. Both the number of companies reporting positive EPS surprises and the magnitude of these earnings surprises so far have been above their 10-year aver-ages
- As proof that the US economy remains healthier than thought by most economists, the “cyclical” two sectors of Information Technology and Consumer Discretionary have been the largest contributors to the increase in earnings for the index since 31st March
- In the second half of the year, earnings are forecast to rise 1.0per cent and 8.4 per cent in the third and fourth quarters of 2023, respectively. For the full year 2023, the forecast is for earnings to edge up 1.3 per cent. While further downward revisions are possible, the outlook for the first v/s second half of the year is quite stark. In the first half of 2023, S&P 500 earnings are forecast to decline -4.3 per cent, improving to a +4.7 per cent gain in the second half of 2023
- As we head towards the summer months, there has long been a market maxim that states: “Sell in May and go away”. Does this expression have any merit? While seasonal factors can change each year, certain discernible patterns emerge. We examined monthly S&P 500 total returns for the last twenty years. Total returns in April have historically been quite strong, followed by weak returns in April and May. However, investors in US equities would be wise to stay invested throughout the summer doldrums as returns in July have been among the strongest of the year
- Ultimately, as Capex and Research & Development (R&D) spending continues to accelerate through-out Corporate America, this technology diffusion should gain further traction. Companies will look to continue to increase spending on technology solutions that allow for higher efficiency levels and mar-gin expansion, especially as Al continues to make further advances. This phenomenon should serve to not only benefit directly the companies that are developing these technology solutions but also the companies that are incorporating technology into their business processes. This incorporation should provide margin expansion, earnings growth, and higher levels of ROIC
- The slowdown in economic activity does not appear to be as severe as feared, which has led us to become less defensive in our US equity sector selections. We recommend investors focus on quality companies with strong balance sheets, cash-generating capabilities, and low levels of net debt