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Zacks strategists (including me) stay bullish. The S&P500 carries a 4,132 “fair value” estimate at YE 2023. Coming years show double-digit fundamental growth.
The S&P500 trades at 4,258. However, a 17.3 forward P/E valuation offers no price value.
But 2024 and 2025 show S&P500 double-digit EPS growth.
Earnings can deliver fundamental lift.
To do that, the annual earnings growth optimism must be matched by ‘real’ data.
A. Bulls rosily envision 2023 U.S. and global EPS performances beating the current pessimism. 2024 and 2025 estimates incorporate that sentiment.
Latest estimates see 2025 S&P500 EPS up +11.4% and revenue up +5.5%
Latest estimates see 2024 S&P500 EPS up +12.0% and revenue up +4.9%
Latest estimates see 2023 S&P500 EPS down -3.1% and revenue down -0.4%
2022 S&P500 estimates show EPS growth of +6.4% and revenue up +14.3%
2021 closed with a snapback S&P500 EPS growth of +50.7% and annual revenue growth of +15.1%
The mantra is always: Don’t Fight the Fed.
However, don’t expect a Powell-led Fed to continue with rate hikes if their bubble popping and CPI crushing gets out of control. That’s the Fed “pivot.”
Don’t focus just on U.S. liquidity.
You also won’t be able to fight the ECB in Europe, the BoE in the U.K., the BoJ in Japan and the People’s Bank of China (PBoC).
All major central bank players can bring the “anything goes” monetary policy artillery.
B. Bears?
Bubbles of euphoria can deflate dramatically and without warning, after a much higher Fed Funds rate crushes the CPI data down, more and more Fresh COVID mutations have shown up
Bears see an added -10% to -30% downside, with spreading deep growth negatives.
This could also be due to an unforeseen swath of corporate bankruptcies and loan and stock margin losses. There is large downside risk to lots of stock and home prices. Those plays are available to shorts.
There are negative side effects to money printing too. Income inequality is growing:
The top 1% now owns nearly 32% of the U.S. total Net Worth
The bottom 50% own 2.0%
A widening income inequality gap is a worldwide phenomenon, fueled by central bank intervention -- whether Fed driven or central bank driven outside the USA.
Consult the U.S. chart next…
Image Source: Zacks Investment Research
The Fed insists their policies do not add to U.S. and global income inequality.
But if you do not own stocks, you do not benefit from the broad increase in share prices.
C. Range-bound sages make light of broad and deep bond market sedation.
For the USA, the 10-year U.S. Treasury rate is climbing. I see the rate at ~4.7%.
All of these 2020 to 2022 factors caused consumer price inflation:
COVID shutdowns
Port supply bottlenecks
Savings accumulated from the ‘stay-at-home’ days
A spending and savings assist supplied by a $908B U.S. CARES act, and
A $1.9T “American Rescue Plan” follow-on
These fundamental & fiscal forces forced the Fed’s rate hand.
In the face of rising bond yields, stock index valuations have receded to historic norms.
Careful institutions have to be more specific -- to find a healthy source of stock returns.
I used to write, month-after-month, that “TINA” is short for “There is No Alternative.”
Now, with 5.0% brokered 1-year CD rates, a meaningful low-risk alternative exists.
D. Zacks October Sector/Industry/Company Telescope
I see a useful mixture of S&P500 sectors to play this month.
Top sectors remained Industrials, Utilities and Info Tech. Consumer Staples got back to Attractive.
Middle sectors are now where the Communication Services, Health Care and Consumer Discretionary sectors are found.
Bottom sectors are Financials and Materials.
(1) Industrials stayed Very Attractive. Business Products, Pollution Control, Machinery Electrical, Metal Fabricating, and Construction-Building Services are tops. Lots here…
(4) Consumer Staples rose back to Attractive from Market Weight. Food/Drug Retail, Food, and Beverages look the best.
(5) Energy rises to Attractive from Market Weight. Coal and Energy-Alternates look best.
(6) Communications Services falls to Market Weight from Attractive. Telco Equipment is best.
(7) Health Care stayed Market Weight. Medical Products leads.
(8) Consumer Discretionary stays at Market Weight. Non-food Retail, Home Furnishing-Appliance and Leisure Services are tops.
(9) Financials falls to Unattractive from Attractive. Invest Banking and Brokering & Banks-Major are best at Market Weight.
(10) Materials stay Very Unattractive. Building Products was a strong outlier.
Conclusion
Let’s finish with Zacks house view on the coming Q3 earnings season.
On Wednesday, October 4th, Zacks Research Director Sheraz Mian laid out his four key Q3 earnings season points.
Four key points:
(1) For 2023 Q3, total S&P 500 earnings are currently expected to be down -2.0% from the same period last year on +0.6% higher revenues, the 4th back-to-back quarter of declining earnings for the index.
(2) Excluding the drag from the Energy sector, whose earnings are expected to decline -3.7% in Q3, earnings for the other 15 Zacks sectors in the S&P 500 index would be up +2.9% on +3.2% higher revenues.
(3) Estimates for Q3-23 held up much better than had been the case in the comparable periods of other recent quarters. In fact, Q3 earnings estimates in the aggregate were barely down since the start of the period, with estimates modestly up when negative revisions to the Energy or Finance sector estimates are excluded.
(4) For the 17 S&P500 companies that have already reported results in recent days for their fiscal quarters ending in August that we count as part of the Q3 tally, total earnings are up +0.6% on +4.0% higher revenues, with 82.4% beating EPS estimates and 70.6% beating revenue estimates.
Happy trading and investing!
Enjoy the rest of the Zacks OCT 2023 Market Strategy report.
John Blank Zacks Chief Equity Strategist and Economist
See More Zacks Research for These Tickers
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Time to Buy U.S. Stocks in Early October?
The following is an excerpt from Zacks Chief Strategist John Blank’s full Oct Market Strategy report To access the full PDF, click here.
Zacks strategists (including me) stay bullish. The S&P500 carries a 4,132 “fair value” estimate at YE 2023. Coming years show double-digit fundamental growth.
The S&P500 trades at 4,258. However, a 17.3 forward P/E valuation offers no price value.
But 2024 and 2025 show S&P500 double-digit EPS growth.
Earnings can deliver fundamental lift.
To do that, the annual earnings growth optimism must be matched by ‘real’ data.
A. Bulls rosily envision 2023 U.S. and global EPS performances beating the current pessimism. 2024 and 2025 estimates incorporate that sentiment.
The mantra is always: Don’t Fight the Fed.
However, don’t expect a Powell-led Fed to continue with rate hikes if their bubble popping and CPI crushing gets out of control. That’s the Fed “pivot.”
Don’t focus just on U.S. liquidity.
You also won’t be able to fight the ECB in Europe, the BoE in the U.K., the BoJ in Japan and the People’s Bank of China (PBoC).
All major central bank players can bring the “anything goes” monetary policy artillery.
B. Bears?
Bubbles of euphoria can deflate dramatically and without warning, after a much higher Fed Funds rate crushes the CPI data down, more and more
Fresh COVID mutations have shown up
Bears see an added -10% to -30% downside, with spreading deep growth negatives.
This could also be due to an unforeseen swath of corporate bankruptcies and loan and stock margin losses. There is large downside risk to lots of stock and home prices. Those plays are available to shorts.
There are negative side effects to money printing too. Income inequality is growing:
A widening income inequality gap is a worldwide phenomenon, fueled by central bank intervention -- whether Fed driven or central bank driven outside the USA.
Consult the U.S. chart next…
Image Source: Zacks Investment Research
The Fed insists their policies do not add to U.S. and global income inequality.
But if you do not own stocks, you do not benefit from the broad increase in share prices.
C. Range-bound sages make light of broad and deep bond market sedation.
For the USA, the 10-year U.S. Treasury rate is climbing. I see the rate at ~4.7%.
All of these 2020 to 2022 factors caused consumer price inflation:
These fundamental & fiscal forces forced the Fed’s rate hand.
In the face of rising bond yields, stock index valuations have receded to historic norms.
Careful institutions have to be more specific -- to find a healthy source of stock returns.
I used to write, month-after-month, that “TINA” is short for “There is No Alternative.”
Now, with 5.0% brokered 1-year CD rates, a meaningful low-risk alternative exists.
D. Zacks October Sector/Industry/Company Telescope
I see a useful mixture of S&P500 sectors to play this month.
Top sectors remained Industrials, Utilities and Info Tech. Consumer Staples got back to Attractive.
Middle sectors are now where the Communication Services, Health Care and Consumer Discretionary sectors are found.
Bottom sectors are Financials and Materials.
(1) Industrials stayed Very Attractive. Business Products, Pollution Control, Machinery Electrical, Metal Fabricating, and Construction-Building Services are tops. Lots here…
Zacks #2 Rank (BUY): Caterpillar (CAT - Free Report)
(2) Utilities stay Very Attractive. Utilities-Water Supply and Gas Dist. are best.
Zacks #1 Rank (STRONG BUY): Veolia Environment (VEOEY - Free Report)
(3) Info Tech rise to Very Attractive. Semis remain notable at Very Attractive!
Zacks #1 Rank (STRONG BUY): NetEase (NTES - Free Report)
(4) Consumer Staples rose back to Attractive from Market Weight. Food/Drug Retail, Food, and Beverages look the best.
(5) Energy rises to Attractive from Market Weight. Coal and Energy-Alternates look best.
(6) Communications Services falls to Market Weight from Attractive. Telco Equipment is best.
(7) Health Care stayed Market Weight. Medical Products leads.
(8) Consumer Discretionary stays at Market Weight. Non-food Retail, Home Furnishing-Appliance and Leisure Services are tops.
(9) Financials falls to Unattractive from Attractive. Invest Banking and Brokering & Banks-Major are best at Market Weight.
(10) Materials stay Very Unattractive. Building Products was a strong outlier.
Conclusion
Let’s finish with Zacks house view on the coming Q3 earnings season.
On Wednesday, October 4th, Zacks Research Director Sheraz Mian laid out his four key Q3 earnings season points.
Four key points:
(1) For 2023 Q3, total S&P 500 earnings are currently expected to be down -2.0% from the same period last year on +0.6% higher revenues, the 4th back-to-back quarter of declining earnings for the index.
(2) Excluding the drag from the Energy sector, whose earnings are expected to decline -3.7% in Q3, earnings for the other 15 Zacks sectors in the S&P 500 index would be up +2.9% on +3.2% higher revenues.
(3) Estimates for Q3-23 held up much better than had been the case in the comparable periods of other recent quarters. In fact, Q3 earnings estimates in the aggregate were barely down since the start of the period, with estimates modestly up when negative revisions to the Energy or Finance sector estimates are excluded.
(4) For the 17 S&P500 companies that have already reported results in recent days for their fiscal quarters ending in August that we count as part of the Q3 tally, total earnings are up +0.6% on +4.0% higher revenues, with 82.4% beating EPS estimates and 70.6% beating revenue estimates.
Happy trading and investing!
Enjoy the rest of the Zacks OCT 2023 Market Strategy report.
John Blank
Zacks Chief Equity Strategist and Economist