This has started to happen, with data from Bank of America showing loan growth for US small caps is not firmly in recessionary territory.
2) The trajectory of corporate earnings. Looking back over history, three-six months after a major bear market low, aggregate earnings for the S&P500 large cap index have tended to stabilise, before accelerating.
If October 2022 was ‘the low’ for the cycle, we can expect earnings announcements in the coming four-six weeks. Events during March are likely to weigh on estimates and indeed financial sector estimates are, unsurprisingly, being marked down sharply.
Earnings are now contracting across small cap stocks, midcaps, and the S&P 500 on an aggregate basis.
For the S&P, consensus estimates are for a -8 per cent contraction in the growth rate in the first quarter for earnings, followed by a -6 per cent contraction in the second quarter.
Thecalendar year 2023 estimate is at -2 per cent and coming down. Our sense is that there is downside risk to this number.
Should the earnings contraction turn out to be modest, this may be well received by the market, assuming the Fed pivots by creating a more favourable liquidity backdrop as a result.
In closing, our data driven investment framework indicates that we should continue to tread carefully. At this juncture, the risk to reward for risk assets is not overly compelling, a position reflected in our asset allocation across our core range of strategies.
Geopolitical risks still loom large, and the lagged effects of the monetary tightening cycle and the global housing bust will start to bite hard.
We have a hard time believing the recent SVB episode to be a ‘storm in a teacup’.
In addition, the US debt ceiling limit has been breached and will need to be negotiated in the coming months. This is an underappreciated risk, and adds to the prevailing sense of uncertainty.
Our flexible investment framework at TEAM, underpinned by a diverse asset allocation universe and the ability to tactically allocate with conviction will remain critical, as risks and opportunities present themselves in the months ahead.
Craig Farley is head of multi-asset investments at TEAM
