Two familiar foes have returned for investors: higher interest rates and a strong US Dollar. Those two were responsible for the broad weakness in financial markets during 2022, and their resurgence was not well received by asset prices last week. Stock indexes fell more than 2%, as did crude oil. So-called ‘safe-havens’ weren’t any better. Gold dropped 1.3%, while Bitcoin had its worst week of the year.
It’s still early in the quarter, but data for Q3 has been overwhelmingly strong so far. Following retail sales, housing starts, and industrial production reports last week, the Atlanta Fed’s GDPNow GDP estimate (a model based solely on data that’s already been reported) was revised up to a 5.8% annual rate. That’s roughly triple the Blue Chip consensus and would mark the fastest pace of growth since the early 1980s (not including the post-COVID rebound). Meanwhile, the Conference Board’s Leading Economic Index just fell for the 16th straight month.
ICYMI: Last week’s insights from Grindstone
Earnings Expectations and Valuation
The stock market selloff in 2022 was not driven by a deterioration in corporate earnings. Though stock prices dropped well over 20% from their peak to trough, expected future earnings remained stubbornly high. That divergence pushed the S&P 500 forward price-to-earnings ratio from more than 20x (a level previously seen only during the late-1990s) to 15x (a level in-line with historical averages).
The first half of 2023 was the opposite experience: stock prices rose, but earnings did not. Profits have now declined for three consecutive quarters. The ongoing correction in stock prices this August has served to dampen valuations a bit, but at nearly 19x next year’s earnings, equities are still far from cheap when compared to historical norms.
Here’s the economic calendar for the week ahead