Dear Investors,
UBS – (11 Market Thoughts)
Return to profit growth expected in US in third quarter
We believe the profits recession is over and the US economy is on track for a soft landing following healthy consumer activity, cooling inflation, and solid growth.
After three quarters of year-over-year declines, we forecast the third quarter of 2023 will bring a return to growth for S&P 500 earnings per share (EPS), with profits rising 3 – 4%.
The macro backdrop is still supportive
The resilient US macroeconomic backdrop continues to surprise positively.
Consumer spending, which accounts for 70% of US economic activity, accelerated in the third quarter.
We believe the changes in expectations for real GDP growth from flat to 3% should provide additional support for earnings growth.
Earnings are being driven by mega-cap growth stocks
These companies are expected to announce 30% plus EPS growth.
Consensus forecasts are for modest declines for the remaining constituents in the S&P 500.
But beyond the worst-performing outliers, trends are improving for the average company, with the growth rate for the median expected to grow at a mid-single-digit rate.
Margin expansion looks set to continue
While we believe lower inflation is likely to have weighed on corporate revenue growth during the third quarter, we estimate costs cooled at a faster pace.
So, we forecast profit margin expansion to continue from last year’s fourth quarter lows.
We believe the “goods recession” looks to be fairly far along and will likely weigh less on profit growth going forward.
Fidelity International – (10 Impressive Updates) Market Perspectives
Markets lacking conviction
The US Fed’s hawkish pause implying higher for longer rates and possible a hike later this year have not been digested very well.
The relatively controlled headline index levels mask churn beneath the surface, with crowding in certain stocks increasing risks, whether in well liked names such as in luxury, renewables and semis, or on the short side such as autos and cyclicals.
With US 10y Treasury yields reaching 16-year highs, this shift will continue to have impacts on funding, business models, asset allocation and multiples.
Japan healthier vs other markets
From a market performance perspective, Japan has had healthier and more balanced returns versus other markets, especially the US.
Moreover, Japan’s earnings backdrop is more favourable than most other markets, with the momentum on earnings revisions accelerating from the second quarter.
This reflects a combination of price hikes and better terms of trade, which have helped companies in a wide range of sectors.
India positioned for growth but valuations rich
India has been one of the fastest growing major economies this year, with the highest recorded Q2 GDP growth.
India’s robust economic fundamentals including high foreign exchange reserves, low debt, and well-contained fiscal and current account deficit means that it has a strong balance sheet.
This means the country is better placed to absorb external shocks.