Broker Check
With A Strong Market in Q1, Optimism Leads to Caution

With A Strong Market in Q1, Optimism Leads to Caution

February 21, 2023

Here’s what you should know: 

  • The stock market has had a very strong start to the year.
  • Excessive optimism may be premature since earnings have been somewhat disappointing.
  • The U.S. unemployment rate stands at a 53-year low, and it can likely only go up from here.
  • We are moving to neutral weight on international equity.

Job cuts at major firms are dominating the headlines. On February 8, Disney said it plans to cut 7,000 jobs and slash $5.5 billion in costs. At the end of last year, Meta said it would cut 11,000 workers, or 13% of staff. Microsoft, Goldman Sachs, Amazon, Dell, Alphabet and IBM have all made large layoff announcements. 

This would seem to make sense, if indeed the U.S. economy is heading into a recession. But the unemployment rate now stands at 3.4%, the lowest level in 53 years, and the stock market just started the year off with a bang: the S&P 500 is up over 6% YTD, and the NASDAQ is up 12% YTD (as of February 12)!

One lesson from the strong January market performance is that timing the market is incredibly difficult. It may have been tempting to reduce portfolio risk after such a rough 2022––but that would have been a mistake. Stock market moves are generally not smooth and predictable, and it’s possible that we have already seen most of the equity market gains this year despite being only partway through the first quarter.

As we always remind our investors, the market really cares about earnings. With more than two-thirds of S&P 500 companies having reported fourth-quarter results, just 69% are topping earnings estimates—below their average of 76% over the past four quarters—and by an average of only 1.6%, less than the typical beat amount of 5.3% in the same period, according to Refinitiv. That rate means earnings per share are still set to fall, by some 1.4% year over year, says Credit Suisse, which would be the first quarterly drop since the third quarter of 2020. That justifies a cautious approach for the next few months.

We remain focused on picking stocks that we think are long-term winners in the markets they compete in, regardless of short-term dynamics.

With that in mind, portfolio highlights include:

  • Moving to neutral from underweight international equity due to a weakening U.S. dollar, better valuations, better dividends, and better earnings forecasts
  • Continuing to favor defensive sectors that will hold up better in a volatile, recessionary environment
  • Many of our international names have been strong performers this year, underscoring the importance of global diversification:
    • MercadoLibre is up 30% YTD
    • Taiwan Semiconductor is up 28% YTD
    • ASML (key semi-conductor supplier) is up 20% YTD

The conclusion of the media-hyped Super Bowl always reminds us that tax season is about to begin in earnest, and we look forward to having more detailed discussions about tax and portfolio strategy with our clients.