Q2-23 reporting is about halfway complete for firms in the S&P 500. Bottom-up operating EPS estimates for Q2 are once again sliding lower as we wade farther into earnings season. This attrition is not uncommon but it is certainly a break from Q1 announcements, where EPS estimates rose 5% over the course of reporting. Q1’s action was a bullish talking point for many who touted the end of higher-than-normal erosion in forward EPS estimates over the past year. Since peaking in April 2022 at $61.56, Q2’s EPS estimate has shrunk nearly 17% (Chart 1).
After years of wandering in the wilderness, Japanese stocks are leading the world’s developed markets higher in what has been a robust opening half of the year. The table shows Japan leading the world’s ten largest developed markets (as measured by the MSCI family of international indexes) with a 24% local currency return through June, easily outpacing the pack. Even as the MSCI USA index gained 17% by successfully “fighting the Fed” this year, Japan surged another 7% beyond that outstanding result. We were curious to understand the nature of Japan’s spectacular run in 2023, looking to identify the drivers of this strong and relatively quick jump higher.
One of the most vivid memories of the Great Depression is the sight of nervous depositors lined up outside a bank hoping to withdraw their meager savings before the bank failed. Like a rare tropical disease that was thought to be eradicated by modern medicine, the classic bank run reappeared this month in the form of Silicon Valley Bank. At the beginning of March, the market had no particular concerns about the potential for systemic bank failures, but SVB’s sudden demise has cast a pall over the entire industry.
To paraphrase that great market historian Leo Tolstoy, “each bear market is unhappy in its own way.” Recession, interest rates, valuation bubbles, inflation, war, credit cycles, oil prices, manias & panics: the tipping point that triggers each bear market is always different. However, bearish forces ultimately manifest themselves in just two ways; declining earnings and/or declining valuations. June’s Of Special Interest report detailed how the current bear market has been fueled entirely by collapsing valuations, with the largest P/E compressions occurring in companies with the highest starting valuations.
The 2022 bear market has been driven entirely by a collapse in P/E ratios. Last month, we noted that the other potential driver of market declines—falling earnings—had yet to raise its ugly head. Now we examine past episodes to consider how the stock market might react when the “other shoe” (EPS) drops.
While investors cheer the stock market on to challenge its all-time high, new COVID-19 cases are also making daily records in the U.S. The first wave of the pandemic helped to tank the S&P 500 by nearly 30% in the course of three weeks, while the second wave, now in development, has yet to deter the raging bulls.