The recent jump in the forward 4-quarter estimate (FFQE) from $222.91 to $228.38 is indicative of a new quarterly period and could provide insight into the current market conditions. The FFQE is currently at $228.81 while the bottom-up calendar year estimate remains above it at $229.24, suggesting that investors are optimistic about future performance despite Friday’s rally which pushed SP 500 earnings yield to 5.86%, its highest level since November 4th’s 6%. With a PE ratio of 17x on the forward estimates, this indicates that the SP 500 may be attractively valued for those looking for potential investment opportunities in the near future. Overall, the increase in the FFQE could provide insight into how investors are viewing current market conditions and may suggest that there is potential upside for those looking to invest. It will be important to keep an eye on this number as we progress through the new 4-quarter period. Only time will tell if these estimates hold true.
The zero-COVID policy represents an upside risk to S&P 500 profits via stronger 2023 global growth, which could increase EPS by up to 100 bp. Weak consumer demand may limit firms’ pricing power and pressure profit margins. Corporate tax policies taking effect in 2023 should have a small hit to aggregate S&P 500 earnings, with the biggest impact on sectors with the lowest effective tax rates such as Info Tech and Health Care. The biggest risk in 2023 is a potential recession, which could lead to an 11% decrease in S&P 500 EPS and cause the index to trough at 3150 (-19%). However, the zero-COVID policy could increase S&P 500 EPS by up to 100 bp. As investors grapple with these and other risks, we believe that sector selection remains critical for outperformance in 2023.
Views
Growth
GDP growth is projected to slow from 0.4% in 2022 (quarter-over-quarter) and then plunge further to -0.9% by 2023 due to the lag effect of more stringent financial conditions and monetary policies that are expected to cool off the economy.
Inflation
A recession this year and ongoing goods deflation, disinflation is expected to be seen in the upcoming years. With our predictions, headline PCE should grow by 5.6% between 2022-2023 (4Q/4Q) with core being 4.7%, respectively followed by 2.5%. All of which will keep inflation within the Federal Reserve’s mandate for it to stay at or above 2% by 2024 end.
Federal Reserve
I expect that the Federal Reserve will increase their target range to 5.0-5.25% by early this year, an estimation that was seemingly supported by the Fed’s statements and policies. My forecast is for a 50bp boost in February followed by a 25bp rise in March, as it appears they are set on continuing this trend of increases throughout 2021.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
CPI
In December, core prices likely rose modestly by 0.3% following the 0.2% increase in November. Shelter inflation was possibly an important factor that could have influenced the trend; however, goods deflation may have acted as a major counterbalance for it. Moreover, gas prices are believed to be one of the significant reliefs to CPI since they declined significantly during this month compared to previous ones. Our forecast suggests total and core price index will grow at 6.5%, respectively 5.7%, on yearly basis due these data points mentioned above.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Aggregate Estimates and Revisions
- 22Q4 Y/Y earnings are expected to be -2.2%. Excluding the energy sector, the Y/Y earnings estimate is -6.7%.
- Of the 20 companies in the S&P 500 that have reported earnings to date for 22Q4, 75.0% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 75.5%.
- During the week of Jan. 9, nine S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Macro Market
I predict global GDP growth will decelerate to a dismal 2.0% by 2023 due to the energy crisis in Europe, financial constrictions as well as the housing market slump throughout China and other countries. As for inflation, I feel its peak is over; with demand contraction combined with better goods supply and stringent monetary policy, it should be no trouble returning inflation rates towards DM target levels within two years’ time.
By the end of 2023, I anticipate core PCE inflation to reduce notably to 2.9%, resulting from an alleviation in supply chain restraints, a climax in housing prices, and slower wage growth (though we presume that progress on wages will be more stagnant than deflation from core commodities and property costs). The joblessness rate should increase to 4.1% by the conclusion of 2023 as well as reach 4.2% at 2024’s cutoff date.
Global Spotlight
French Prime Minister Elisabeth Borne is set to present President Emmanuel Macron’s much-anticipated pension reform proposal on Jan. 10, following intensive talks with unions and opposition parties who, thus far, have expressed strong opposition to the plan. The government aims to simplify the country’s pensions system and increase the retirement age from 62 – a measure that has been met with fierce resistance by unions and opposition parties.
Once unveiled, the proposal will be discussed within Borne’s cabinet on Jan. 23 before being presented to parliament – a process that could take several weeks or even months as debate continues into the summer. Although the government is expecting resistance from unions and political opposition, it appears likely that the reform will pass in parliament with support from the center-right opposition party Les Republicains, or through the controversial use of ”Article 49.3”, which would allow the government to pass legislation without a parliamentary vote.
The consequences of this proposal are likely to be felt for some time, as unions and other opposition groups threaten strikes and demonstrations against the pension reform. Even if the plan passes, it is likely that social unrest and disruption to French industry will continue for some months. Consequently, businesses should consider developing contingency plans in order to mitigate any potential impact from these protests.
China has announced that it will be lifting its quarantine restrictions for inbound travelers starting on January 8th, 2021. This move marks the first step towards allowing Chinese tourists to travel internationally again and could help tourism-dependent economies such as Thailand begin to recover from the economic impact of the COVID-19 pandemic. Despite this development, other countries may impose testing restrictions on Chinese travelers, which could prove to be a low risk of retaliation from China.
In addition, the reopening of borders around the time of the Lunar New Year (January 22nd this year) could lead to a large influx of Chinese citizens abroad potentially bringing back COVID-19 into China as it is experiencing its largest wave of the virus yet. It is expected that authorities will be tightening up border control measures and health protocols in order to ensure a safe and healthy return of Chinese travelers.
Ultimately, with China’s quarantine restrictions ending on January 8th, more Chinese citizens are likely to begin traveling once again. Although this could provide economic relief for some countries, it is important that cross-border health protocols are properly implemented in order to prevent another global wave of COVID-19 infections.
On January 13th, Japanese Prime Minister Fumio Kishida and U.S. President Joe Biden are expected to meet at the White House in Washington D.C., to discuss various topics of international security, such as the North Korean threat and tensions over Taiwan. Additionally, Kishida will be pressing Biden to extend tax breaks earmarked for American green technologies in the U.S. Inflation Reduction Act to Japanese products, however it is unclear whether Biden would agree to such a request.
Previously, Kishida’s government had proposed doubling Japan’s defense budget by 2027, and it is likely that President Biden will be voicing his support for this new, more assertive Japanese defense policy. The two leaders are also expected to discuss a range of other issues such as trade, investment and the future of Japan’s energy supply.
The visit is an important opportunity for both nations to deepen their ties in the face of threats posed by North Korea’s nuclear program and increased tensions between China and its neighbors. It also provides a chance for the two leaders to recalibrate their relationship after four years of relative stagnation during former President Donald Trump’s term in office.
The visit will be closely watched by both Washington and Tokyo, as it could set the tone for future relations between the two nations going forward. The discussion between the two leaders on January 13th could be a major first step in further strengthening their relationship. It will also provide an indication of how Japan and the U.S. can work together to tackle regional issues such as North Korea, Taiwan and China’s increasing aggression in East Asia.
The North American Leaders Summit will be held in Mexico City on January 9-10, where U.S. President Joe Biden, Canadian Prime Minister Justin Trudeau and Mexican President Andres Manuel Lopez Obrador will gather to discuss important topics such as economic stability, security, immigration, and more. At the summit, President Biden is expected to visit the U.S.-Mexico border region to address the recent surge in illegal immigration and offer support for clean energy projects and semiconductor investment, which is something that President Lopez Obrador has asked for. Prime Minister Trudeau will also bring attention to a stalled trade dispute with Mexico concerning its policy of favoring its state-owned power company.
The topics discussed at the summit are sure to have an impact on all three nations, not only economically but politically as well. With increasing tension between individuals from different regions and countries, this summit could be seen as a step forward in bridging gaps between various communities from North America and beyond. It could provide a platform to better understand the issues affecting each nation, allowing them to better come together to find solutions that will benefit all stakeholders.
The North American Leaders Summit is a great opportunity for the three countries to come together to discuss important matters and work towards a common goal of improved economic stability, security, and immigration standards across the continent. It is sure to be an event filled with difficult conversations but also productive dialogue that could have lasting effects on North America and beyond.
Stratfor.com
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