The S&P500 decreased for the sixth week in a row -- the first time since 2011 -- as concerns that high inflation will force the Federal Reserve to induce a recession, prevailed. US large-cap equities have declined by -16% since January 2022 high of 4797, with valuations reverting rapidly to long-term means. US equities were mixed to start the week (Monday: -0.4%, Tuesday: +1%), managing to stay slightly above the 4000 level.
Indeed, the 12-month forward Price to Earnings ratio has retreated by 4 points to 17.2x, remaining though still 1.4 points above the 20-year average of 15.8x. On the other hand, expectations for corporate profitability have been broadly stable at $235 per share, whereas our earnings’ revision indicator has moved sideways.
Q1 earnings results were better-than-feared. As the season for the S&P500 is drawing to a close, EPS growth stands at a decent +9% year-over-year ($53 per share), from expected growth of +5% yoy in the beginning (April 11th). Energy companies account for the lion’s share of growth due to skyrocketing oil prices. Excluding Energy, S&P500 EPS growth rate would be +3% yoy.
Materials (+42% yoy) and Industrials (+34% yoy) posted strong growth as well, albeit the latter due to smaller losses from the 5 Airlines (-$4Β in Q1:2022 vs -$9Β in Q1:2021). Excluding airlines, Industrials’ EPS growth would be +7% yoy. On the contrary, Consumer Discretionary (-33% yoy) due to negative reporting by Amazon and Financials (-20% yoy), lagged.
Looking forward, out of the 76 companies that have issued EPS guidance for Q2:2022, 53 have issued negative and 23 have issued positive (ratio of 70%), broadly in line with the 10-year average ratio of 67%.
For 2022 as a whole, analysts are projecting S&P500 EPS growth of +10% (+6% excluding Energy) and a further +10% in 2023 (+11% excluding Energy) to $249 per share. Analysts have not revised earnings expectations significantly lower, despite a growing set of macroeconomic headwinds (inflation, supply chain disruptions, labor costs, geopolitics). On the other hand, equity prices reflect significant recession risks.
Notably, based on earnings calls’ transcripts, 377 of the companies that have reported so far have cited the term “inflation”, the highest number since at least 2010. Supply disruptions related to the ongoing Covid-19 pandemic are expected to exacerbate near-term inflationary pressures. US Core CPI remains persistently high (+6.2% yoy).
Safe haven assets rallied due to growth concerns. Government bond yields decreased significantly in the past week, with the 10-Year US Treasury yield down by 20 bps to 2.93%. For the first time in six weeks, stock-bond correlation turned negative.
The geopolitical backdrop remains highly fluid. Sweden and Finland have declared their willingness to apply for NATO membership, with the formal applications expected within days. A unanimous approval by NATO members (30) is needed. Although Turkey has expressed reservations, NATO officials appear optimistic for a speedy inclusion of the two countries in the alliance.