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