Earnings surprisingly resilient away from US smaller companies
The resilience of the equity market may be justified given the resilience around earnings, in some parts of the market.
Profit expectations for the smaller companies index, the Russell 2000, have fallen through 2022-23. This is typical of an economic slowdown and has justified our stance within portfolios of a preference for Quality larger companies relative to US smaller companies.
Larger US companies, captured by the S&P 500 index, have seen their profits stabilise, buoyed by the delivery of better-than-expected profits from the likes of Meta (Facebook) and other monopolistic technology giants.
Away from the decline in profits for US smaller companies, profits have been resilient elsewhere and surprisingly upbeat for non-US companies (EPS: 12 month forward Earnings per share)
Source: Bloomberg, Artorius
The surprise around profits has been delivered by non-US equities. Aided by both a weaker US Dollar, (which helps profit growth outside of the US) and a better-than-expected economic outcome, despite the energy price shock, profits in Europe and other developed markets have climbed through the past eight months.
Inflation - a problem not going away soon?
Inflation remains higher than policymakers would want but is heading lower. The key for interest rate decisions is how quickly inflation eases in coming months. If policymakers expect inflation to decline quickly back towards their targets of 2% then interest rates may stop rising in the next few months.
So, the recent inflation data especially in the US is a welcome update. Whilst there are many ways of cutting the data, the Federal Reserve has highlighted the measure that excludes volatile factors, such as food and energy, as well as housing. Although the resultant ‘Core Service inflation excluding housing’ is a small part of the overall inflation environment faced by the consumer (just 27%), the Federal Reserve still looks at it for decision making purposes. This has fallen back but is still running high and appears to be inconsistent with a 2% inflation target.
The market is at odds with the Federal Reserve, who expect rates to remain stable over coming months, while the market is pricing rate cuts later this year.
US inflation remains too high for policymakers to think about cutting interest rates…..unless a recession forces the issue
Source: Bloomberg, Artorius
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