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Weekly Newsletter
Today’s outline
  • Double Down
  • Earnings Season
  • Bear For Longer
  • Financial Condition
  • Buy Banks?
  • Chinese Logistic Reported 1Q22

Double Down
The week's most significant event was the FOMC decision to increase the Fed Funds Rate (“FFR”) by 50bps. Also, Powell said that 50bp increases in the FFR should be on the table at the next couple of meetings.

The market already expected a second 50bp hike in June. Market prices suggest they revisit their Fed forecast to include a third 50bp hike at the July meeting (vs. 25bp previously).

In response to a question, Powell said that a “75bp increase is not something the committee is actively considering,” which was taken as a dovish statement.

Also, the curve indicates that the odds for a fourth 50bp rate hike are possible in September, but we believe odds should stay at 25bps until there are additional data.

While some Fed officials might see the FOMC’s 2.25-2.5% neutral rate estimate as a possible point to transition from 50bp to 25bp hikes, implying a fourth 50bp hike in September.

The market is maintaining its 3-3.25% forecast but anticipating the FOMC will reach that rate by 2Q23 (vs. 3Q23 previously).

In our opinion, Powell doubled down at the call that inflation has peaked, even though the evidence suggests otherwise.

The stake placed at risk is high. On one side, if he’s right and inflation peaked, that's fine. On the other side, if Mr. Chairman is wrong, they’ll be so behind the curve they’ll cause a huge demand shock adjusting the FFR.

We believe that he’s wrong and that market conditions should tighten even more. We’ll go back to this topic in a minute.

Earnings Season

Investor concerns about Fed tightening, surging interest rates, and the risk of recession have outweighed the 1Q earnings reports. So far, almost 90% of the S&P 500 reported earnings.

As always, results exceed the sell-side expectations leading to the so-called “upward revision” for the remainder of the year and possibly for the following.

However, analysts don’t tell you that the aggregate earnings surprise was 5.1%, though it was reported that 77.7% of the companies presented a positive earnings surprise.

Furthermore, the market expected a mild 2.5% earnings growth (YoY), which should be translated into a contraction in real terms.

The actual aggregate earnings growth (YoY) is 7.6% and considering an 8% inflation, the S&P earnings are contracting (YoY). A few sectors, such as Financials and Discretionary, slumped.

Source: Giro Lino, Bloomberg

Bear For Longer
Indeed, results have exceeded expectations and prompted modest upward revisions to estimates for the remainder of 2022 and 2023, mainly driven by the Energy sector.

However, boosting revisions should not be enough to offset managers’ fears. It’s worth noting that our base case modeling for the S&P 500 doesn’t consider an overshooting scenario.

Next, we'll present our target for the S&P500 and introduce a bear case scenario. Click here if you wish to continue the reading.
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