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Feb 2023
In January of this year, the non-farm payroll report revealed an impressive surge in job growth, with 517,000 jobs added – a significant increase from the expected 185,000. As a result, the unemployment rate hit a new low of 3.4%, indicating the possibility of a “soft landing” where employment conditions may not deteriorate significantly. While a strong job market is favorable for the economy, it can be unfavorable for the Federal Reserve.
In particular, a tight job market may require more time for wage growth and inflation to ease. As a result, the likelihood of the Federal Reserve cutting interest rates soon may decrease. Previously, the market had anticipated that the Federal Reserve would raise interest rates once (peaking at around 4.9%) and cut rates three times before January 2024. However, the current expectation is for two more rate hikes (peaking at around 5.1%) followed by two rate cuts before January 2024.
This change in expectation brings it closer to our baseline expectation, which is that the Federal Reserve may raise rates in 2023 and keep them at around 5% until the end of the year. This approach is aimed at avoiding the stop-and-go policies seen during the stagflation of the 1970s. While a strong job market is favorable for the economy in the short term, it is important to maintain a balance that supports sustainable economic growth over the long term.
The earnings season for Q4 is largely over, with over 70% of S&P 500 companies having reported. The results are generally in line with lowered expectations, with Q4 profit forecasts having been lowered by 14% since June of last year. The overall surprise is 0.8%, far below the historical average surprise of 5.4%.
In addition, forward guidance continues to be lowered. Q1 2023 profit expectations have been lowered by 4.5% since the beginning of this year, and Q2-Q4 expectations have been lowered by 2-3%, bringing the expected earnings growth for 2023 down to 2.6% (2.8% lower than the estimate at the beginning of the year). We still believe that the market’s expectations are too high. As the economy weakens, sales growth may slow and profit margins are likely to decrease due to rising costs.
Despite the bleak earnings outlook, stocks have responded positively throughout the earnings season, with an average price reaction of +0.8% in the three days following the report (although the situation is more complex at the individual stock level, with roughly half of the stocks rising in price and the other half falling due to performance). The strong economic data at the beginning of this year, coupled with investors’ fear of missing out, have pushed the market’s good performance.
The stock market has experienced a strong rebound since the beginning of 2023, with both the S&P 500 and the Nasdaq index showing gains. In addition, the stock market has broken through several technical resistance levels, showing a positive technical trend. However, due to short-term random indicators being in overbought territory, it is important to remain patient.
Overall, we believe that the market is trying to turn around and we expect the stock market to rise in the next 12 months. However, there are still many adverse factors that may affect the market and it is important to remain patient and pragmatic. When increasing the risk exposure of favored stocks, it is important to be cautious.