The Weekend Edition # 116 - Thank you for 2023!

Welcome to another issue of the Weekend Edition and the last one for 2023!

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here's what we cover

• Market Recap - The Magnificent 2023

• Macro Surprises for 2023

• Earnings Outlook for 2024

  • What will characterize earnings for 2024?

  • Earnings growth or multiple expansion?

• The Week Ahead - Calendars

• Closing Thoughts - Thank You for 2023!

Market Recap - The Magnificent 2023

Hindsight is always 20/20. But, I’d make an exception for the US markets in 2023. Even with perfect hindsight and knowing what we know, it’s hard to believe where we landed in terms of the overall indices.

I’ve included Year-to-Date price changes for my market snapshot above. Wow, Bitcoin. While it got a late start in the year, Bitcoin is up a whopping +164% for the year, followed by the Nasdaq-100 at 53%. We now sit very close to 52-week highs on all of the indices.

When things are bad, we expect strength to lead, and lead they did. The Magnificent 7 came out looking like champions. This chart, or variations of it, is one for the history books.

Turning to the S&P 500 sectors, the top performer was none other than Tech while the worst sector was Utilities.

In terms of industries, semis led the way, followed by homebuilders.

In terms of factor performance, people wanted spicy vs. boring and predictable. We saw growth and high beta lead, while dividend stocks and low volatility lag. There was some quality preference there, though.

Last but not least, the winner was Nvdia!

Turning over to the Global Markets, YTD performance-wise, the top 3 spots are:

1. Argentina

2. India

3. Greece

Who would’ve thought? Argentina has runaway inflation and a currency that’s like paper. India got a shock decline when the rug was pulled on the Adani Group, which dominated a lot of the gains before that. Greece was on the brink of default a few years back.

Commodities

A fun roller coaster year for Commodities, with so much going on in terms of OPEC, geopolitical risks, and El Nino weather patterns.

While the overall top performer still remains Orange Juice, within the broader commodities - Cocoa, Iron Ore, and Gold outperformed. NatGas had a terrible year, particularly in the last few weeks, while Wheat and Corn also took a beating mainly following the WASDE report in October that showed supply would be higher than demand.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro Surprises for 2023

The “Economy” in 2023 remained far more resilient than anyone had imagined it would be clocking in real GDP growth rates that we couldn’t have guessed. There were a number of “surprises” let’s say, that deviated from what should have happened and kept the US economy in what seemed to be good shape.

I’ve been looking at a hard landing for some time now not because of inflation but rather because of the way economic activity has deteriorated. Our K-shaped economy theme + government intervention has masked a lot of the cracks beneath the surface. So not all is well and uniform!

I’ve been writing about Macro all year so I don’t want to go on and on, but here’s a quick recap of what we didn’t anticipate, in no particular order:

• The labor market imbalance, i.e., demand > supply, kept job creation going, and unemployment at historical lows. Because of that tightness, wages also remained high for a while, particularly for higher income people.

• The stimulus in the system for consumers lasted well beyond its term.

• The wealth effect that was driven by the housing market. Higher home prices meant mortgages still remained intact, i.e., equity in homes didn’t deteriorate to the extent expected.

• Refinancing of loans and particularly mortgages at lower fixed rates meant there was still some breathing room in income. US Household debt to GDP is around 70%, much lower than during the GFC. So many consumers were not over-leveraged and with 70% of the debt being fixed-rate mortgages, the consumer got by.

• We had a banking crisis, but surprisingly, not driven by defaults but rather a lack of deposits and unrealized losses on the safest of assets - US government debt.

• Government spending particularly through the Inflation Reduction Act and the CHIPS Act drove real GDP growth far more than expected.

• Excess savings, while dwindling, still remain a strong force in the system. BEA revised up some of the numbers.

The Fed has been choking the system at crucial points with the help of US treasury, and they know it. Hence, the dovish pivot. 

We still see a 50% chance of recession, but by my calculation, the Fed starts cutting in mid-2024 before anything is declared. 

The truth is, the US economy is probably already in a recession by many measures but as they say, it ain’t over until the NBER sings! 

Before we move on though, I wanted to share two of my favorite charts from 2023 tweets.

Earnings Outlook for 2024

2023 marked the year that the S&P 500 finally came out of an earnings recession. Yay!

Here’s where we stand for 2023:

What will characterize earnings for 2024?

While it’s best to look at earnings every quarter, we do expect certain trends to affect companies based on the macro. While the SPX and Nasdaq did their thing in 2023, we did see some of that macro weakness in earnings come through as well.

For next year, I think the bar is higher now, not just in terms of the actual earnings estimates, but in terms of the expectations. With the Fed’s dovish cooing, we’re going to have the market all hopped up on the indices going to the moon. So we’re going to have an optimistic outlook for at least the first few quarters, so earnings better deliver!

For the most part, I do see a recovery in quite a few of the sectors.

• Energy is a big one for me, and I see from FactSet, that the market thinks so as well. (pls see chart below)

• I’ve been terribly disappointed with Healthcare for 2023 and I foresee some recovery there as the market decides these are now undervalued.

• Small- and Mid-cap value could see some love given that some of these names have also been unfairly oversold

• Barring unforeseen circumstances, a weaker dollar, lower freight rates and growth in emerging markets will likely bring some positive momentum to revenues and earnings.

• We also think lower wages, and an easing in the labor market will actually help earnings to a large extent mainly because we foresee US unemployment still remaining quite low at 4.3%.

But, you know me, I can’t have a market discussion without highlighting risks. We still see certain risks to earnings which are:

• Following on from our 2024 Macro Outlook we do expect consumer spending to slow and GDP growth to weaken. A K-shaped economy where the top quartile continues to spend while the bottom two quartiles slowdown will mean lower widespread discretionary spending.

• Lower Inflation will mean companies will have to revise down some of their Revenues and Earnings. This is why Consumer Staples is expected to have the least optimistic outlook.

• Higher rates mean higher Interest Payments and lower earnings when the Maturity Walls hit. Considering that many companies refinanced debt for 3 to 5 years starting in 2020-2021, we’re up against a major part of that maturity wall in 2024.

  “As we enter 2024, there are $171bn of high-yield bonds maturing in 2024 and 2025, which equates to 12% of the outstanding HY bond market, with an additional $194bn coming due in 2026; the combined three-year maturity wall accounts for a record-high 25% of outstanding.” - JP Morgan

• Not much left in the way of cost-cutting, so there’s little room to maneuver from here and a slowdown will mean lower earnings.

• Buybacks will come back but, still remain lower than in previous years, and please remember the 4% forecast that GS is showing below is YoY, so growing from a lower base. I’m glad to see this one actually. I’d rather have solid earnings driving price.

Earnings growth or multiple expansion?

The consensus EPS for 2023 according to Refinitiv is $219.67 (as of Dec 21). With an 11.5% expected increase in EPS for 2024, that brings us to an EPS number of $245 for 2024. At 19.5x P/E, that leads to an SPX level of 4,777.5 for 2024.

So, from what it would seem, analysts are still not really projecting earnings to be the reason for the SPX to hit 5000. They’re still considering a multiple expansion here. If we work backward to target 5000 with $245 in earnings, we end up with a P/E of 20.4x for the SPX in 2024, which is not altogether unreasonable since we’re right now at a P/E of roughly 21.5x.

But, we have to consider that this high level of P/E is driven by a handful of companies. If the market broadens out, which may be the case given the Fed’s intentions to start normalizing policy next year, we’re likely to see multiples decline marginally but still remain above the long-run average of 17x.

The bottom line is that we’re still looking at a multiple expansion story for next year to lead the S&P 500 higher, instead of strong earnings growth. Personally, I’d much rather have the earnings growth.

The Week Ahead - Calendars

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts - Thank You for 2023!

2023 has been a year of surprises. And just like the magnificent turnaround in the markets, my life made a turnaround as well.

In early 2022, my partner Mayhem, asked me what it is I want to do with my life. I was in between projects, still working with banks, and I sincerely couldn’t answer that question.

I’d spent 18 years in the banking and finance industry and while handling multi-million dollar deals stroked my ego, none of it was mine. It was great work and I did it with a lot of passion but something was missing.

I am grateful for all those years but now, I feel like I have found my purpose.

And it’s all thanks to you.

This newsletter is what made me realize that I could use everything I’ve learned and help more people. So your continued readership has encouraged me and keeps me going. For that, I am ever grateful.

This year, we started MacroVisor, with no sense of how it would do and whether we were even reaching people. I transitioned this newsletter there and I didn’t know whether anyone would continue to stick with us.

But, I am overwhelmed with the support that we’ve received.

We’ve had our struggles in growing and I am grateful to my partner, Mayhem for keeping me on the path, every time we’ve had a tough day. He certainly brings the energy and I could not do this without him!

And while not a part of MacroVisor, we want to thank our partner, Horse, at Traderade, for holding down the fort there and supporting our efforts to build a macro-focused platform.

As we close out 2023, we want to thank you for sticking with us through the ups and downs, we thank you for still opening our emails and we thank you for supporting our work with your hard-earned money.

In return, we promise to work even harder and continue to bring even better research and ideas so we can grow together.

We wish you and your family, a very Happy New Year! Let’s make 2024 great!

Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.