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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Don’t Fight the Rally
Market Commentary/Strategy
Stifel
March 3: The bearish chorus of Wall Street strategists continues to fight the
S&P 500
rally since the intraday low (3,491.58) on Oct. 13, 2022, with those strategists flip-flopping from calling an imminent recession (caused by the Fed) to no recession (so, the Fed must cause one). Some say it is a “bull trap” but that misses major trades in a range-bound, decadelong channel. They can call it a bear-market rally, a bear trap, or call it a banana.
We aren’t ignoring potential six-month 10%-15% rallies. Some say Equity Risk Premium is low (in a “death zone”), but incorrectly compare earnings yield (a real yield) to nominal Treasuries, and suboptimally use forward earnings yield (earnings per share/price, price/earnings ratio upside down) instead of the superior cyclically adjusted P/E ratio (we use operating EPS to calculate CAPE earnings yield).
On Oct. 24, 2022 (S&P 500 close 3,797), we had forecast a 13% S&P 500 six-month-rally to 4,300 by April 2023, which is still our view. Downside risk is an issue in 4Q23, but in a secular bear market, investor time horizons must shorten (and strategists must do the same).
Barry B. Bannister, Thomas R. Carroll
Too Much Bearish Sentiment
Ivan Feinseth Market View 360
Tigress Financial Intelligence
March 3: Bearish sentiment remains high, with the recent Association of Individual Investors bearish sentiment index increasing to 44.8% from last month’s 38.6%, hitting its highest level since late 2022 and well above the 31% historical average. Bearish sentiment and ongoing calls for further declines in U.S. stocks continue to support stocks, especially with extremely bearish and defensive positioning that could unwind at any time, driving an upward rally.
Ivan Feinseth
Earnings Kick Into Gear
The Prudent Speculator
Kovitz Investment Group Partners
March 3: Economic statistics in the [fourth quarter] weren’t exactly anything to write home about. Yet real (inflation adjusted) U.S. GDP growth came in at 2.7% in Q4, supporting solid revenue and net income numbers from Corporate America, even as management teams engaged in their usual tempering of guidance. Impressively, the number of S&P 500 companies that exceeded bottom-line forecasts was 68.6%, in line with the usual “beat” rate, while 58.3% eclipsed top-line projections…
Standard & Poor’s projects (as of Feb. 28) that after dipping from $208.21 in 2021 to $196.09 in 2022 (last year’s figure includes a massive $66.9 billion [$4.74 per share] “unrealized investment” loss from
Berkshire Hathaway
in Q2), bottom-up operating earnings per share for the S&P 500 will rise to $219.13 in 2023. Estimates are subject to change (current forecasts are lower than those three months ago) and much will depend on the health of the U.S. and global economies, but anything close to that ’23 tally should support much higher stock prices.
John Buckingham
Small-Caps’ Advantage
Weekly Strategic Insights
Waddell & Associates
March 3: So far in 2023, smaller companies’ stocks have risen more than larger companies’, with the
S&P 600 Small Cap
index returning 8.2%, the
S&P 400 Mid Cap
index returning 7.5%, and the S&P 500 Large Cap index returning 3.22%. We attribute this to a valuation reversion to the mean, which could persist for quite a while. The largest stocks in the S&P 500 became wildly overowned and overvalued, with the five largest companies in the S&P 500 comprising 26% of the entire index value prior to 2022’s drop.
Today, they comprise about 21% of the S&P 500’s index value. When you compare P/E ratios, the S&P Small Cap index trades at 13.7 times earnings; the S&P Mid Cap index trades at 14.2 times earnings; the S&P 500 Large Cap index trades at 17.5 times earnings, while the Mega-8 (
Apple
,
Amazon.com
,
Alphabet
,
Meta Platforms
,
Microsoft
,
Netflix
,
Nvidia
,
Tesla
) trade for 25.5 times earnings. The outsize share of these few companies within the S&P 500 index primarily directs performance. If we compare valuations of the Small Cap index with these megacap heavyweights, it trades for a 45% discount. This wide valuation disparity invites convergence, presenting small-cap investors with ample scope for continued outperformance.
David S. Waddell
Real Estate Distress
The Weekly Speculator
Marketfield Asset Management
March 3: Victims of variable-rate financing continue to emerge, with a growing trend of “voluntary defaults” in commercial real estate. This euphemism is used to describe an attempt by a borrower to force a securitized loan into default so that the special servicer may step in to renegotiate the terms of a loan. In theory this can be a “win-win” process, with the borrower paying a rate it can afford and the lenders still receiving a yield that is in excess of what they anticipated at the time of securitization.
However, there is an obvious limit to this, and the key word to focus on is “default” rather than “voluntary.” This is especially true of projects where leasing activity is well below expectations. It is our growing belief that we are witnessing the beginnings of a distressed cycle in commercial real estate (both office and multifamily) that will exceed expectations by a considerable margin. We suspect that pressures are building in highly indebted corporate issuers, as well, but have yet to see the same signs emerge.
Michael Shaoul, Timothy Brackett
Bostic Yardstick
From an essay by Raphael Bostic, president and CEO of the Federal Reserve Bank of Atlanta, titled “Striking a Delicate Balance in Making Policy.”
March 1: So, now we must determine when inflation is irrevocably moving lower. We’re not there yet, and that is why I think we will need to raise the federal-funds rate to between 5% and 5.25% and leave it there until well into 2024.
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