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August was a month of two halves for FT Wilshire 5000 return delivery

September 6, 2022

Hawkish Fed guidance sends FT Wilshire 5000 into reverse gear in August

Market Navigation

August witnessed a significant reversal in risk appetite mid-month in response to a succession of hawkish Fed guidance. This bought an end to the +18.6% two-month rally that started on June 16 and peaked on Aug. 16. Since the mid-month peak, the FT Wilshire has declined -8.1%, producing a -3.8% move for the month of August.

Exhibit 1: August brought an end to the two-month rally  

 

August saw a rotation back to small cap and value stocks

The mid-August reversal also produced a rotation in style performance. The table below shows that most of the underperformance of large cap relative to small cap in August was attributable to the larger negative contributions from the financials, digital info and services, health care and technology sectors.

Exhibit 2: Four sector-weighted contributions account for small cap outperformance

Rising bond yields cause growth to lose momentum vs value

Rising bond yields impacted the highly valued long duration growth stocks in August and this resulted in the growth style (with its large exposure to the technology and digital information sectors) losing momentum relative to value as the month progressed.

Exhibit 3: Two sector weighted contributions account for growth underperformance

Still a way to go before the growth vs value trade reverts to 2016/17 levels

Exhibit 4 puts the growth vs value rotation into a longer perspective. Despite the scale of value outperformance so far this year, the relative trade still has a long way to go in order for it to mean revert back to 2016/17 levels (parity levels).

Exhibit 4: The long term perspective on Growth v Value relative performance

15585188 E1122

US EPS forecasts – glass half full or empty?

July 18, 2022

Consensus EPS growth forecasts have been resilient - is this reassuring or highlighting the risk that an EPS downgrading cycle is yet to commmence?

Market Navigation

Despite the significant economic, monetary policy and geo-political induced volatility in equity markets in the first half of 2022, consensus EPS growth forecasts have been remarkably resilient. Is this reassuring or is it highlighting the risk that an EPS downgrading cycle is yet to commence?

Glass half full-rock steady EPS forecasts

Chart 1 shows the status of regional market consensus EPS growth forecasts for this year and next and measures the revisions (deltas) to the forecasts made at the end of last year. US growth forecasts have hardly changed over the last six months.

Chart 1: Regional consensus EPS growth forecasts

Source: Refinitiv, FactSet

The US 2022 and 2023EPS trails emphasize the steadiness in the forecasts over the last few months - showing no impact (so far) from the uncertainty and volatility of the market.

Chart 2: US Estimate trails

Source: Refinitiv, FactSet

Glass half empty –top-down headwinds yet to impact

The resilience in consensus forecasts could be providing a false sense of security. One of the key areas of concern is that analysts have a poor track record in predicting macro driven falls in EPS.

Chart 3 compares consensus12M forward EPS forecasts with trailing (reported EPS), and the forward estimates tend to follow (not lead) reported EPS down. Are analysts waiting for guidance and reported data to decline before they start reducing their forecasts?

Chart 3: Comparing US consensus EPS forecasts to reported (lagging) EPS

Source: Refinitiv, FactSet

The significant rise in input prices (both labor costs and materials) creates top-down headwinds for corporate margins. Some find it hard to reconcile these headwinds with unchanged EPS estimates.

Chart 4: US labor costs and input prices

Source: Refinitiv, FactSet

Index 15303321 E0922

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