The first half of the year probably didn’t go the way many fixed income investors had hoped, particularly after the historically awful year last year. It wasn’t a horrible start—more in line with recent years—but expectations were high this year, with many calling 2023 the year for fixed income.
Earnings season is upon us as some banks and a small handful of other blue chip companies have already reported results for their quarters ending June 30. The results on the surface probably won’t offer much to write home about given consensus estimates imply a 7% year-over-year decline in S&P 500 earnings per share. However, the key question is always what’s priced in, which at least offers an opportunity for markets to react positively, though our best guess is we get the typical upside surprises and guidance reductions, giving this rally a convenient excuse to take a breather.
The long dormant capital markets have recently begun showing signs of interest from institutional investors and deal makers anxious to bring companies to market. While activity remains muted at best, expectations are focused on 2024, when there is a prevailing consensus that the Federal Reserve (Fed) will be finished with its rate hike campaign, and that economic conditions will be resilient enough to underpin a strong capital markets environment.
Bull markets are not linear. However, the impending end of the Federal Reserve (Fed) rate-hiking campaign, and the economy’s and corporate America’s resilience, help make the bull case that steers LPL Research toward a neutral, rather than negative, equities view from a tactical asset allocation perspective.
As the economy is likely downshifting, investors should take heed that the Federal Reserve’s (Fed) current stance is eerily similar to early 2007. During that time, the Fed held a tightening bias since they believed the housing market was stabilizing, the economy would continue to expand, and inflation risks remained. Clearly, their expectations were not met as the economy soon fell into recession. That’s not suggesting another 2008 is coming, but rather highlights how fast the economic environment can change.
The Federal Reserve (Fed) meets this week where it is largely expected to not raise short term interest rates for the first time in 15 months. However, Fed messaging has been all over the place in recent weeks.
Stocks have had a nice run, but at higher prices, the bar for further gains gets higher.
Mega-cap stocks, which have outlier market capitalizations and are often referred to as ‘the generals,’ have made an impressive comeback this year.
LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) recommends investors maintain a neutral duration relative to benchmarks with the expectation that Treasury yields are likely headed lower (or at least not much higher) over the next few quarters.
There’s plenty to worry about the rest of the year (debt limit, recession, tightening financial conditions, a Federal Reserve (Fed) policy mistake, among them), but the risk of an additional sharp contraction in profit margins has come way down.