New highs for Russell 3000, plus earnings update, FANG explodes, recession risks, rate expectations, and one simple graphic
The Sandbox Daily (2.6.2023)
Welcome, Sandbox friends.
Today’s Daily discusses the expansion in the new highs list for the Russell 3000 index, an earnings season update, the FANG index had best one-month rally on record, Goldman Sachs sees recession risks receding, Friday’s BLS jobs report shifts rate expectations, and 30 reasons not to invest in the last 30 years.
Let’s dig in.
Markets in review
EQUITIES: Dow -0.10% | S&P 500 -0.61% | Nasdaq 100 -0.87% | Russell 2000 -1.40%
FIXED INCOME: Barclays Agg Bond -0.55% | High Yield -0.64% | 2yr UST 4.474% | 10yr UST 3.644%
COMMODITIES: Brent Crude +1.84% to $81.41/barrel. Gold +0.21% to $1,880.5/oz.
BITCOIN: -1.25% to $22,779
US DOLLAR INDEX: +0.69% to 103.627
CBOE EQUITY PUT/CALL RATIO: 0.57
VIX: +6.00% to 19.43
New highs !
In a typical bull market, the number of stocks making new highs expands. This is particularly true during the early stages of a bull cycle.
Last week, the Russell 3000 Index saw more components reaching new 52-week highs than at any time over the trailing year.
The Russell 3000 Index comprises about 98% of tradable U.S. equities, providing one of the broadest measures of the U.S. stock market. More stocks are making new 52-week highs this week than in early January 2022, when the equity market hit all-time highs.
Bulls need to see a growing number of stocks make new highs to support the recent rally, and that’s exactly what took place late last week.
Source: All Star Charts
Earnings season update
The performance of S&P 500 companies continues to be underwhelming, although better-than-feared, at the midpoint of the Q4 earnings season.
Of the ~50% of companies in the S&P 500 that have reported Q4 earnings, 70% have reported actual EPS above estimates, which is below the 5-year average of 77% and below the 10-year average of 73%.
In aggregate, companies are reporting earnings that are +0.6% above estimates, which is below the 5-year average of +8.6%, and below the 10-year average of +6.4%.
The blended earnings decline (blended combines actual results for companies that have reported and estimated results for companies that have yet to report) for the 4th quarter is -5.3% today. If -5.3% holds as the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decrease in earnings since Q3 2020 (-5.7%).
4 of the 11 sectors are reporting earnings growth YoY, led by the Energy and Industrials sectors. On the other hand, 7 sectors are reporting a YoY decline in earnings, led by the Communication Services, Materials, and Consumer Discretionary sectors.
The forward 12-month P/E ratio is 18.4, which is below the 5-year average (18.5) but above the 25-year average (16.8). It is also above the forward P/E ratio of 16.7 recorded at the end of the 4th quarter (December 31), as the price of the index has increased while the forward 12-month EPS estimate has decreased since December 31.
Source: FactSet, JPMorgan Asset Management
FANG+ index had best one-month rally on record
“Big Tech” stocks like Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL) have taken a breather over the past few days after reporting earnings last week. It’s important to note, however, just how much these stocks had rallied leading up to their near-term highs last week. Through last Thursday, the NYSE FANG+ had rallied +34.44% over the prior month – marking its biggest month-over-month rally in the index’s history dating back to 2014!
Source: Bespoke Investment Group
Receding recession risk
Goldman Sachs released the following note to their clients on Monday morning:
We have cut our subjective probability that the U.S. economy will enter a recession in the next 12 months from 35% to 25%, less than half the 65% consensus estimate in the latest Wall Street Journal survey. Continued strength in the labor market and early signs of improvement in the business surveys suggest that the risk of a near-term slump has diminished notably. And while Q1 GDP still looks soft—our latest tracking estimate is +0.4%—we expect growth to pick up in the spring as real disposable income continues to increase, the drag from tighter financial conditions abates, and faster growth in China and Europe supports the U.S. manufacturing sector.
The revised 25% estimate is above Goldman’s unconditional probability that the U.S. economy will enter a recession in any given 12-month period, which has historically averaged 15%. The main reason is that the rebalancing of the labor market remains incomplete.
Source: Goldman Sachs Global Investment Research
Jobs report shifts rate expectations
Many expected the Federal Reserve to deliver their final rate hike at the Federal Open Markets Committee (FOMC) meeting on March 22nd.
With Friday’s blowout jobs report, the Federal Funds Rate is now showing a ~69% chance of the Fed hiking another 0.25% at the May 3rd meeting, which is up from ~37% chance one month ago on January 6th.
The Fed is telling you they are watching the labor market, now the market is saying the same thing – recalibrate your expectations based on continued strength in the jobs data.
In turn, the BLS jobs report shocker boosted the market-implied terminal rate back above 5%.
Source: CME FedWatch Tool, The Daily Shot
One simple graphic
Fear is not the foundation for long-term investors. It’s also not an appropriate investment strategy.
We can all make excuses for holding cash – in fact, here's 30 good reasons to do so.
Yet, somehow SPY did +816.3% cumulatively since February 6, 1993. That’s +7.66% annualized across three decades!
Don't invest (live) in fear. Your future self will thank you.
Source: Advisors Capital Management
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.