Monthly Outlook 202302: Time to Deal With More Disappointments
MonthlyOutlook202302 EquityResearch·StrategyResearch·MonthlyOutlook TimetoDealWithMoreDisappointments ReportAbstract: ThemarketisnowexpectingamorehawkishFed.AsmaintainedinourforecastssinceNovember2022,therallyinoverseasmarketssurroundingexpectationsfortheFed’sratecutisbeingrepairedtothedownside.Powellremainsambiguous,releasingdovishsignalsbystatingthatthefederalfundsratemaybekeptunder5%in2023,butthemarkethasbeguntodigesttheprospectofratesrisingabove5.3%. ThesuppressionofliquidityduetotheFed'sQTisanothersourceofconcern.QTisstilldrainingbankreservesinsteadofbalancesintheRRPmarket.TheFedhasclaimedthatQTwillpotentiallycontinueevenwhenratecutsbegin,butthecurrentlevelofbankreservebalancesisalreadyveryclosetotheFed’stargetofreducingitto10%ofGDP.ThemarketgenerallybelievesthatasignificantreductioninbankliquiditywillforcetheFedtoendQTbeforetheendof2023,butwecannotruleoutthepossibilitythattheFedwillletreservesfallbelowthe$2.5trillionthreshold.Riskyassetswillhencebenegativelyimpactedastaperingcontinuesforanindefinitedurationandthecostoffundsrises. Bereadyforapessimisticearningsseason.TheUSjobmarketdataremainsstrong,butmassivelayoffsatgiantssuchasGoogle,AmazonandDisneyarecausingincreasingglobalimpactandconcern.Someeconomistsbelievethatlayoffsareunlikelytoremaininvisibleformuchlonger.However,aseconomicdataisstillvague,itremainsdifficultfortheFedtodecidewhetheritistherighttimingtocutrates.Meanwhile,analystshavebeguntodownwardadjusttheirearningsexpectationsfor2023Q1.Withboththeeconomicrecessionandrisinginterestratescomingintoplay,itappearsinevitablethatboththeearningsandvaluationofUSstockscouldfallsimultaneouslyinthequartertocome. Atthecorporateearningslevel,68%ofS&P500companieshavereportedactualEPSaboveestimatesfor2022Q4asofFebruary17,2023,whichissignificantlylowerthanthepastfive-yearaverageof77%andten-yearaverageof73%.Meanwhile,S&P500companiesasawholehavemadedownwardrevisionstoyear-over-yearearningsgrowthfor2022Q4,whichis -4.7%asofFebruary172023comparedto-3.3%attheendof2022. Sectorswiththelargestdownwardrevisionsbetweentheendof2022andFebruary172023arefinancials,energy,andcommunicationservices.JudgingfromthelevelofpricechangesinceDecember312022,theenergysectorhasmorepronouncedly“pricedin”thedownwardearningsrevisions,whilethefinancialandcommunicationservicessectorsshouldstillhavespacefordownwardadjustments.Atthesametime,weexpectthehealthcareandconsumerstaplessectorstorallyintheshorttermduetotheirupwardearningsadjustments. Risks:DownwardadjustmentstoUSstockearningscouldhitstockpricesfurther;InflationcouldbestickierthanexpectationandtheFedmaynotcutratesin2023,disappointingmarketexpectationsformonetaryeasing;PolicymiscalculationbytheFedcouldworseneconomicrecessionandhitbothvaluationandearningstoalargerextent. 1March2023 ResearchAnalystShiruiOuyang(852)38923120 ouyangshirui@dwzq.com.hk Relatedreports 1.EmbracingRisksandOpportunities 2022-04-11 2.TheUSStockMarketHasNotFullyPricedinInflationDataandInterestRateHikes 2022-06-29 3.FadingInflationandGrowth:WhatAretheSignalsDeliveredbyUSEconomicIndicators? 2022-07-20 4.NegativeInterestRateEraisOver,andWhereisEurope Headed? 2022-08-09 5.BePreparedforFurtherAggressiveFedRateHikes 2022-09-16 6.ReduceriskexposuretoEuropeanmarketsandbewareofliquidityshortageintheUS 2022-10-17 7.ReduceriskexposuretoEuropeanmarketsandbewareofliquidityshortageintheUS 2022-11-28 8.TimingtheRecessionandtheFed'sPivot:BullishandBearishViewsonthe2023USStockMarket 2022-12-31 Wewouldliketoacknowledgethecontributionandsupportprovided byHanruoFeng(冯涵若). TableofContents 1.TheMarketisnowexpectingamorehawkishFed3 2.Bereadyforapessimisticearningsseason6 3.RisksHighlight9 TableofFigures Figure1:InvestorsarenowexpectingthatpolicyrateswillpeakoutinJuly20234 Figure2:InvestorshopedpolicyratestopeakoutinMay2023threemonthsago4 Figure3:Themomentumforratehikesisstillclimbingasobservedinthe2-yeartreasuryyield4 Figure4:RRP+bankreservebalancesamounttoabout5trillionUSD5 Figure5:QTisdrainingbankreservesinsteadofbalancesintheRRPmarket5 Figure6:Sharprisesinsearchesfor"unemployment"arehistoricallyaccompaniedbyfallinginflation6Figure7:S&P500EarningsAbove,In-Line,BelowEstimates:2022Q4(asof2023.2.17)7 Figure8:S&P500RevenuesAbove,In-Line,BelowEstimates:2022Q4(asof2023.2.17)7 Figure9:S&P500yoyEarningsGrowth:2022Q48 Figure10:S&P500yoyRevenueGrowth:2022Q48 Figure11:S&Psectorspricechangesince2022.12.318 Figure12:S&Psectorspricechangesince2022.12.318 Figure13:Teslapricechange9 Figure14:Metapricechange9 1.TheMarketisnowexpectingamorehawkishFed AsmaintainedinourforecastssinceNovember2022,therallyinoverseasmarketssurroundingexpectationsfortheFed’sratecutisbeingrepairedtothedownside.Comparedtoaquarterago,marketexpectationsforthepeakofratehikeshavenowbeenpushedbackfromMaytoJuly2023andtheexpectationforthepeakpolicyratehasalsoincreased.Themomentumforratehikesisalsostillclimbing,asobservedinthe2-yeartreasuryyield,whichreflectsthemarket’sexpectationsforratehikes.Powellremainsambiguous,releasingdovishsignalsbystatingthatthefederalfundsratemaybekept
