Fed Week Then Santa?

All Sectors Down:

Equity markets were down last week -3 to -5% depending on the domestic index. The S&P 500 gave back -3.35%, with all sectors down. Energy, banks, and telecom services were the worst groups.

Oil prices continued lower on the back of lower oil demand. U.S. gasoline prices hit new lows for the year and are now lower than a year ago. As of Thursday (12/8/22), WTI oil prices were down 4.7% year-to-date. Yes, you read that correctly, oil prices have deflated the last 12 months.

The markets finished lower as investors remain concerned about the economic landscape and potential earnings estimates cuts for 4th quarter 2022 and 2023. The historically deep 2- and 10-year yield curve inversion highlights the Fed’s prioritization of inflation over growth.

Technically speaking, the S&P 500 continues to battle with the declining 200-day moving average.

Valuations have been resetting throughout 2022 alongside tighter Fed policy and higher real interest rates.

The Fed controls short-term interest rates and their move to fight inflation has led to a consistent rise in real interest rates since December 2021.

 

Consensus earnings expectations, based on bottom-up numbers, has the S&P 500 earnings growth at barely 5% for 2023.

Consumer discretionary, industrials and financials are at the top of the growth estimates, while energy earnings, after being 2022s lone positive surprise, are expected to fall more than 10%. Exiting 3rd quarter 2022, earnings expectations were for 8% growth next year, so the revisions have been to the downside throughout 4th quarter 2022.

The cuts seen for 4q22 earnings mark the largest decrease in EPS estimates during the first two months of a quarter since the pandemic in 2q20.

Consumer sentiment remains at levels last seen during the Financial Crisis in 2008-09.

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