U.S. economy is slowing, but that won’t stop the Fed from raising rates in the next FOMC meeting May 2-3rd, 2023. The Federal Open Market Committee is expected to boost the benchmark lending rate target by another quarter percentage point to 5-5.25% on Wednesday, it will be the 10th consecutive increase going back to March of last year. After May, we expect the Fed to hold rates steady for the rest of the year, depending on how severely the bank stress affects the economy. U.S. equities were mostly higher this week, the S&P 500 Index was up 0.87% at 4169.48, a nearly three-month high; the Dow Jones industrial average was up 0.86% at 34,098.16; the Nasdaq Composite was up 0.69% at 12,226.58. Sector performance was mixed as communication services and technology outperformed the most and utilities and industrials underperformed the most. Generally strong earnings results from the biggest technology companies provided a positive market momentum. Cyclical sectors performed poorly as investors considered several signs of an economic slowdown, particularly in the manufacturing sector. US equities were mostly flat throughout April, resulting in a sharp pullback in an index that measures investors’ short-term expectations of market volatility. The S&P 500 added 1.5%, the Dow rose 2.5%, and the NASDAQ posted a tiny gain, while the Cboe Volatility Index ended April at the lowest level since November 4, 2021.Treasuries were stronger, with the two-year yield falling to 3.85% midweek and ending slightly above 4%. The dollar index ended the week weaker. After dropping more than 5% the previous week, the price of U.S. crude oil dropped again, falling below $77 on Friday. Economic growth continued to slow in the first quarter of 2023. The preliminary reading of 1Q gross domestic product increased by 1.1% quarter over quarter after increasing by 2.6% in Q4 2022. According to analysts’ growth was impacted by seasonal factors and a boost to consumer spending thanks to warmer weather. It is expected that growth will slow further in the upcoming months as credit conditions tighten, interest rates remain high and high inflation continues to reduce consumer spending. Spending on durable goods was stronger than expected in March, as durable goods rose by 3.2% MoM, after falling by 1.2% the prior month. Durable goods orders were driven higher by increased orders in transportation, excluding transportation, growth rose by only 0.3% MoM in March. We expect durable goods orders to decline as credit conditions are expected to remain tight. Consumer spending growth was strongest in the beginning of 1Q and slowed by the end of 1Q. We expect that growth will slow as it is sensitive to interest rates even thought final sales to domestic purchasers increased by 2.9% in 1Q, emphasizing that the economy remained resilient. Ahead of a U.S. Federal Reserve meeting, a report released on Friday showed that the Fed’s preferred measure for tracking inflation continued to moderate. The Personal Consumption Expenditures Price Index rose at a 4.2% annual rate in March, down from a 5.1% increase in February. Excluding volatile food and energy prices, core inflation rose 4.6% in the latest month. Other economic data released last week showed that headline personal consumption expenditure (PCE) inflation was stronger than expected for 1Q. The headline PCE rose by 4.9% year over year. Core PCE inflation, the preferred measure of inflation of the Federal Reserve, rose by 4.9% This confirms that inflation remains too high for the Fed, which will raise rates next week. First-quarter S&P500 earnings update. Corporate earnings have so far exceeded analysts’ projections by a surprising margin. According to FACTSET. Overall, 53% of the companies in the S&P 500 have reported results for Q1 2023 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 73%. On average companies are reporting earnings that are 6.9% above estimates, which is below the 5-year average of 8.4% but above the 10-year average of 6.4%. Five of the eleven sectors are reporting year-over-year earnings growth, led by the Consumer Discretionary and Industrials sectors. On the other hand, six sectors are reporting a year-over-year decline in earnings, led by the Materials and Health Care sectors. Eight sectors are reporting year-over-year growth in revenues, led by the Financials and Consumer Discretionary sectors. On the other hand, three sectors are reporting a year-over-year decline in revenues, led by the Materials sector. Looking ahead, analysts expect earnings growth for the second half of 2023. For Q2 2023, analysts are projecting earnings decline of -5.0%. For Q3 2023 and Q4 2023, analysts are projecting earnings growth of 1.7% and 8.8%, respectively. For all of 2023, analysts predict earnings growth of 1.2%. The forward 12-month P/E ratio is 18.1, which is below the 5-year average 18.5 but above the 10-year average 17.3. It is also equal to the forward P/E ratio of 18.1 recorded at the end of the first quarter. Equity and bond markets will experience elevated volatility until there’s a meaningful and consistent decrease in inflation, and the duration of higher rates is more certain. Investors are focusing on the cumulative effects of rate hikes on the economy. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure, since China’s economy and market has been disappointing. We’ve recently become more constructive on Developed International equities, as the energy recession wasn’t as severe as anticipated. In the United States, large-cap equities provide an attractive blend of quality, yield, and growth at a reasonable value, even though earnings expectations continue to deteriorate. For fixed income we remain defensive in our credit positioning and higher in credit quality.
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