Dear Investors,
Rothschild & Co – The work is not finished yet
Unfinished monetary tightening
“June was an extraordinary month for central banks.”
“The Bank of England surprised markets by increasing its interest rates for the thirteenth consecutive time by an unexpectedly large 50 basis points.”
“The ECB raised rates and signalled more to come – most likely as soon as at its July meeting”
“despite the economy shrinking in late 2022 and early 2023 and disappointing business confidence.”
“The central banks of Australia and Canada resumed rate increases after a pause in their tightening cycles, while smaller central banks in Norway and Switzerland continued on their path of raising rates.”
“The Fed chose not to raise rates despite officials increasing their inflation forecasts”
“but guided markets towards an extended period of higher interest rates with a July hike likely.”
Inflation focus
“Consumer prices that are too high for too long could make the task of bringing inflation down difficult.”
“Given the decline in real wages since the pandemic, wage catchup is to be expected and business will have to absorb some of the expected rise in labour costs through lower profit margins.”
“However, if they were to resist and instead decide to pass on the cost to consumers.”
“Inflation reduction would only be gradual which risks disanchoring expectations and producing further upside cost pressures.”
BlackRock – Market expectations
“Higher expected corporate earnings mask broad pressure under the surface. We see more earnings pain ahead and look for opportunities at the sector level.”
“Bond yields have jumped, and we think markets are at a key juncture as central banks are poised to hold tight on policy.”
“As Q2 results begin, corporate earnings need to deliver on market expectations to support stocks, in our view.”
“We see a key divergence in earnings forecasts: They have risen for a few tech firms, while the rest stagnate.”
“Profit margins are shrinking, and we see more pressure ahead. So we get granular and favor sectors like healthcare within developed market stocks.”
Earnings outlook
“Q1 earnings growth was flat to slightly negative, Refinitiv and Factset data show.”
“That mask significant divergence”
“We see a common denominator between what’s driving market performance this year and earnings – the artificial intelligence (AI) buzz.”
“S&P 500 earnings forecasts for the next 12 months have risen in recent months along with the market rally driven by tech firms with the largest market capitalization.”
“Stripping out those mega-cap tech stocks, forecasts are flat this year (yellow line). 2023 consensus estimates have been cut but remain well above our expectation.”
“We expect Q2 data will be similar to Q1 as the reporting season kicks off this week, with a contraction hitting in the second half of 2023.”
“We assess profit margins, shaped by earnings and revenues, for cracks, too.”
“Margins jumped during the pandemic when consumer demand for goods was strong and companies could push up prices as input costs soared.”
Treasury yields
“U.S. 10-year Treasury yields approached 15-year highs above 4% and stocks dipped last week after U.S. jobs data showed a still tight labor market.”
“The unemployment rate fell lower, labor participation hasn’t risen further and wages are still growing even after the Fed’s rapid rate hikes.”
“We think the yield move and equity retreat signal we are at an important juncture”
“Markets are coming around to our view that central banks will be forced to keep policy tight to curb inflationary pressures.”