- Our Asset Allocation update – 2023 Outlook details our recommended 17% exposure to international equities for investors with a Balanced risk profile.
- 4Q US earnings were lacklustre overall, with cracks also beginning to show in consumption.
- Several global franchises are trading at 15-25% discounts to consensus estimates of intrinsic value, offering opportunities for long-term, portfolio investors.
US Earnings season macro: Mixed views from 3Q US earnings season
All eyes remain on the Fed: Recent US Economic data has shown inflation to be as resilient as the consumer. Many US CEO’s acknowledge a likely recession in 2023. That outcome is likely to be very much correlated with what the Fed does, and what US banks do in response.
Some US Fed governors have recently addressed hot inflation data in January saying they were concerned, but that they also didn’t want to overreact. The Fed will be closely watching inflation and employment before their next meeting on March 21-22.
US 4Q earnings were underwhelming overall, and particularly so for tech companies with Apple reporting a rare miss. Companies beating analyst earnings estimates was well below the long-term average as some steep earnings misses reflect the sting of sticky inflation and rising rates.
S&P500 companies are forecast to report a 4.6% yearly drop in earnings, marking their first earnings decline since late 2020 (Covid).
Resilient consumption generated better than expected results for big box retailers Target and Walmart, however cracks are also beginning to show.
Home Depot is concerned consumers are becoming less resilient to the economy noting “some deceleration in certain products and categories, which was more pronounced in the 4Q.” Lowe’s meanwhile, warned that they were preparing for a “more cautious consumer” this year.
Beware unintended consequences: Recent concerns in the global banking sector raise the question of whether they reflect the beginning of a systemic crisis or are just more isolated issues. Credit Suisse was widely seen as the weakest link among Europe’s large banks, but it is not the only bank that has struggled with weak profitability in recent years.
Moreover, it was the third “one-off” problem in a few months, following the UK’s gilt market crisis in September and the US regional bank failures early March, so it would be premature to assume there will be no other problems coming down the road.
Managing risk: We have been concerned about the risk of unintended consequences from the fastest pace of interest rate increases in modern history. The impact of higher rates on the financial sector comes through with a lag and when interest rates move up so sharply it shouldn’t be a surprise if financial strain manifests.
We continue to advocate exposure to the largest, highest quality global franchises, where many will use economic weakness to grow market share and consolidate their leading positions. Many are now offering clear long-term value.
International shares bearing the brunt of macro uncertainty
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