Year End Comments

 

This week, we decided to replace the Chart of The Week with the comment and video found below. We encourage you to click on the three minute video and listen to Tom’s comments .

 

As 2022 comes to a close, we thought it would be a good time to summarize the outlook for 2023. The comments below are from Lori Calvasina, our head of U.S. Equity Strategy, and the video link is from Tom Porcelli, our Chief U.S. Economist. We find Lori’s small cap conviction interesting and worth exploring as we have been underweight small cap for some time.

 

Takeaway #1: In late November we reiterated our YE 2023 S&P 500 target of 4,100, and lowered our 2023 S&P 500 EPS forecast by ~4% to $199. § Our 4,100 target anticipates a flattish year in the S&P 500. It’s the median of five different models encompassing analysis on the economy, valuations, sentiment, politics, and stocks vs. bonds. Our most optimistic test puts the index at 4,600, our “bull case” if our “base case” of 4,100 is too conservative. § For EPS, we are leveraging consensus economic forecasts, baking in sub 1% real GDP throughout 2023 and CPI that falls to 3.1% at the end of next year. We also bake in a few Fed cuts in the 2nd half and the 10-year yield returning to 3.5%.

 

Takeaway #2: We continue to anticipate choppy conditions in US equities over the next few quarters, with stocks caught in a tug of war. § Our sentiment work is constructive, and our valuation model also implies that moderating inflation and slightly lower interest rates can support modest P/E expansion. § The Fed, geopolitics, earnings, the limping economy, and the diminished appeal of stocks relative to bonds are key problems. § The S&P 500 continues to trade on the 2002-2003 path which would call for a pullback from December to March.

 

Takeaway #3: On positioning, we prefer US equities over non-US equities, Value over Growth, and Small Cap over Large Cap. § Our highest conviction call is Small Cap over Large Cap. We upgraded Small Cap to overweight back in July. Small Caps have actually been outperforming Large Caps since mid-May. We were early on this call and see more room to run. § There are four things we really like about Small Caps right now – (1) Valuations still look attractive, (2) Small Caps are more domestic, meaning the stronger US dollar is less of a headwind, (3) Small Caps have a better earnings profile than Large Caps right now, and (4) Small Caps already appear to be baking in a recession – Small Cap performance is already baking in a spike in jobless claims and a plunge in ISM to typical troughs.

 

Tom Porcelli’s comments are below (please click link)


https://players.brightcove.net/3650909074001/Yfp1EZjElM_default/index.html?videoId=6316616203112

 

Chart of The Week

WCI Shanghai to LA Container Freight Index

 

 

This chart illustrates how the onset of COVID-19 set off a six-fold increase in the cost of shipping a 40-foot container from Shanghai to Los Angeles. What is remarkable is how that entire move up, which peaked in mid-2021, has now been reversed. During this price spike, we all experienced tremendous inflationary price increases on many of the goods that we purchase. Does this reversal mean double digit inflation is a thing of the past? Should we view this as the turning point of the centrals bankers’ fight against inflation? While we believe inflation is still here, we are of the opinion that the inflation numbers may come in lower than expected in coming months, allowing the central bankers to become more moderate in their interest rate increases. If we are correct, and inflation does come in at the lower range of expectations, this could have a meaningful impact on the equity and bond markets. Please feel free to call us to discuss how best to position your portfolio for this possibility.

 


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Charts of The Week

Has the selling been overdone? One of our golden rules is to invest in companies that are delivering good news. Most often, this is measured by positive earnings. The following three charts of Microsoft, Amazon and Alphabet are great examples. Beneath each chart is the five year historic revenue and earnings per share numbers, as well as RBC’s 2022-2024 earnings forecast. As you can see, revenues continue to grow and while earnings have seen a setback in 2022, are forecast to return to more normalized growth rates over the next two years. So why is Microsoft down 28%, Amazon down 45%, and Alphabet down 34%YTD?. Are these stocks cheap or are we missing something? We are well aware that multiples have contracted in the current environment, but our experience tells us that perhaps most of the bad news has been discounted, and that developing some exposure to the growth sector of the market is of merit. While purchasing individual securities can be very rewarding, we believe initially, investors should take a broader approach by investing with a proven growth manager. We would recommend Brown Advisory and have included a sample portfolio (attached).

As always, please feel free to call us to discuss.

 

 

*RBC Capital Markets Estimates
Amazon 2018 2019 2020 2021 2022E* 2023E* 2024E*

Revenue(billions)

232.89 280.52 386.06 469.82 508.78 559.42 632.86

EPS (diluted)

1.01 1.15 2.09 3.24 -0.18 1.43 2.89

 

*RBC Capital Markets Estimates
Microsoft 2018 2019 2020 2021 2022E* 2023E* 2024E*
Revenue (billions) 110.18 125.5 143.02 168.09 198.3 221.4 241
EPS (diluted) 2.13 5.06 5.76 8.05 9.21 9.46 11.22

*RBC Capital Markets Estimates
Google 2018 2019 2020 2021 2022E* 2023E* 2024E*

Revenue (billions)

136.96

161.4 182.35 257.49 282.3 300.28 337.36
EPS (diluted) 2.19 2.46 2.93 5.61 4.62 5.04 6.03

 

Getting Ahead for Tax Season 2020

As the 2020 tax season approaches, here are some overall tips that can give you a head start in your preparations. This would be a great check point for any past or upcoming transactions you might be considering. Click here to view the Handy Financial Plan.

Why try to make sense of the markets on your own? As your professional wealth managers, it is our mission to provide you with absolute clarity in today’s confusing financial world. We care about your goals for your family, your business and your retirement, and we have the resources and knowledge to help you reach them. The result?
True peace of mind.

 

 

 

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