This is our biggie each quarter, pages of charts and the context to go with them. As always, we think the windshield view is far more relevant than the rearview. But it’s through the rearview that we get a sense of the path traveled to this point, helping to set the course ahead. Executive summary here:
The Good
The U.S. Consumer has Never Been Healthier
We believe the aggregate consumer is flush with cash, and once pent-up demand can safely be unleashed, the U.S. economy can continue to rip higher. The average U.S. Household are worth ~30% more. Consumer balance sheets are well fortified and flush with cash-ready to spend when supply chain and virus risks ease.
The Bad
Inflation is Persistent, Though Peaking?
The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations. But it appears that inflation is beginning to peak, even though the 5YR inflation breakeven figures are well above the Fed’s 2% target. For markets, how the Fed chooses to address inflation is as important as the inflation itself.
The Ugly
Phantom Earnings Potentially Driving Negative Revisions
Earnings Expectations for the S&P 500 have only come down 3% in 2023. Anecdotally, margins continue to compress at the corporate level, but have not yet been represented in overall analyst’s earnings expectations. We believe that if earnings were to significantly drop, which they tend to fall ~20% during a recession, the market could follow.
Fed Tightening Misstep
The yield curve officially inverted in Q1 2022. Now, it is up the Fed Chair Jerome Powell to recognize the level of flattening. This means caution in communication if the Fed is to avoid the mistakes of the Yellen Fed, namely inverting the yield curve and slowing the flow of liquidity to main street by redirecting said liquidity towards Wall Street. We believe the Fed is between a rock (slower growth) and a hard place (inflation).
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Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
The S&P 500® Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2210-5.
