Investment Comment
27th January 2023
Earnings: company and workers
“‘T’is the season” for a focus on corporate earnings. US companies provide quarterly updates on their profitability, and we are in the middle of the reporting season. After a strong rally in equity markets from mid-October lows, investors appear to be wanting good news to take the market higher. With investors seeing inflation falling through 2023, so they have priced in Central Banks reigning back on policy tightening.
It is unclear if the Federal Reserve is in a hurry to move to stop raising interest rates as quickly as the market is discounting. This gap between investor hope and policymaker reality may derail the risk seeking rally seen over the past few months. The rally is striking given the continued deterioration of economic survey data and earnings’ reports over the past few weeks.
Company reporting
Global earnings estimates are being cut at an increasingly rapid pace through much of the developed world, threatening to put more pressure on stocks. Earnings revisions (the number of 12-month forward earnings upgrades minus downgrades over the last three months) are rapidly decelerating in Europe, and it is weighing on the outlook for the overall developed market ex-US.
The ratio of cuts to upgrades has recently levelled out in the US, though the number of reductions nearly doubled the number of upgrades -- the worst ratio among major global markets. Emerging markets momentum may be improving, driven by an improving outlook in China, but cuts still far outpace upgrades. Earnings are expected to stagnate in 2023 in both Europe and the US. However, with economic growth weakening, any further downgrades will see earnings lower in 2023 than in 2022.
Workers of the world unite in claiming higher wages
Whilst it is true that wages have risen by a robust clip, in most economies wage increases have lagged inflation which has resulted in falling living standards. Central Banks are watching to see if the rate of wage inflation moderates alongside the easing of headline inflation. indeed, the recruitment company, would suggest that wages are easing back. Advertised wage inflation posted by firms seeking to recruit are showing signs of lower rates of growth. This is the case across different economies, but also across different wage levels in the US.
As inflationary pressures ease this reduces the pressure on central banks to keep tightening policy through rising interest rates and this in turn has led to falling bond yields. As the chart below shows, yields rose dramatically, particularly for short-term bonds (2-year yield in the chart) peaking in October last year as inflation data kept surprising higher and central bank “hawkish” rhetoric was in full swing. However, as inflation data has improved and other economic data has signalled a slowing economy, expectations for rate rises have lowered. This powered a strong 4th quarter rally in markets, which has continued into the New Year.
Wage growth appears to be easing across western economies….
Source: Artorius, indeed Wage Tracker (github.com/hiring-lab/indeed-wage-tracker).
The data are monthly median year-on-year growth rates in advertised wages and salaries across job title-region-salary type combinations. The euro series data is an employment weighted average of France, Germany, Ireland, Italy, the Netherlands and Spain.
…And in the US across different pay grades
Source: Artorius, indeed Wage Tracker.
Note: Wage tiers are determined by a category's median posted wage in 2019.
The indeed wage tracker examines the growth of wages and salaries advertised in job postings, an indicator of how much employers need to pay to make an immediate hire. If the pay of new hires is already slowing, then the pay of all workers is likely to follow. The wage tracker suggests post-pandemic wage growth has peaked. While it is still too early to say with certainty whether wage growth will continue to slow, we will keep watching this trend, and its implications for real wages and monetary policy, as we head into 2023. If wage inflation has peaked then the pressure on Central Banks to raise interest rates will fall, and we suspect that equity and bond markets will take that outcome positively.
Life quickens
With longer days as winter withers, so a positive outlook is only natural and it’s a time for learning new skills. A recent introduction to my life (and to the wider world) is ChatGPT. This application of Artificial Intelligence (AI) technology was launched in November 2022. It can be used to source answers to factual questions, compose poetry or music, or build programs in computer code. For evangelists the opportunities to change work practices are immense. In the meantime, reports of ChatGPT passing MBA exams and writing homework for school children highlights immediate changes to how information is regarded in the educational setting. Is knowledge power when ChatGPT provides knowledge to any and everyone?
For those like me who are largely sceptical of the impact of technology, the time it took to reach 1 million users was: 3.5 years for Netflix, 10 months in the case of Facebook, 2.5 months for Instagram and only 5 days for ChatGPT. I am reminded of Justin Trudeau’s quote: “The pace of change has never been this fast, yet it will never be this slow again.”
Gerard Lane Chief Investment Officer
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FP20230127001 EXP 10/03/2023