Earnings Growth by Sector, Powell Comments

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Earnings Growth by Sector, Powell Comments

Two items for “Data” today:

Topic #1: Which S&P 500 sectors have the best chance to show earnings growth this year? In aggregate, Wall Street analysts expect the index to show 9.3 percent bottom line growth versus 2021. A good number – if it comes true – and it’s even better than it looks. At the end of last year, the Street was looking for 9.0 percent growth. Even with all the issues surrounding the US and global economy, they have upped their earnings growth expectations. This improvement, however, is not uniform.

Here are the sectors where analysts have been increasing their 2021 – 2022 earnings growth expectations since the end of last year (data courtesy of FactSet, link below):

  • Energy: +28.3 percent expected then, +62.4 percent expected now
  • Materials: +2.7 pct then, +7.3 pct now
  • Technology: +10.0 pct then, +12.5 pct now
  • Real Estate: +7.6 pct then, +9.6 pct now
  • Health Care: +7.2 pct then, +7.5 pct now

And here are the sectors where analysts have been reducing their earnings growth expectations since the end of 2021:

  • Consumer Discretionary: +32.6 percent expected then, +20.1 percent expected now
  • Communication Services: +6.7 pct then, +2.0 pct now
  • Utilities: +5.8 pct expected then, +2.2 expected now
  • Consumer Staples: +5.7 pct then, +5.1 pct now
  • Financials: -9.0 pct then, -11.3 pct now
  • Industrials: +34.8 pct then, +33.3 pct now

Takeaway: Energy is the clear standout here, and we continue to like the sector both for its earnings leverage and possible revaluation relative to other groups. Health Care is our pick for risk averse investors, and we also like that analysts are revising their earnings growth rates higher. Among the sectors where analysts are reducing growth expectations, Industrials still look good to us (revisions have been small) and Financials do as well (higher rates should help 2023 earnings growth).

Topic #2: Fed Funds Futures moved noticeably today in response to Chair Powell’s comments about the possibility of raising rates by more than 25 basis points at a given FOMC meeting this year. His exact quote:

“We will take the necessary steps to ensure a return to price stability… In particular, if we conclude that it is appropriate to move aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

Here are the current odds for various Fed rate policy scenarios implied by futures (prices from just before the 4pm close for US equities, see link below) as compared to the recent past:

May 4th meeting (50 basis point rate increase now more likely):

  • 57 percent odds of a 50 basis point hike, up from 44 pct on Friday, 53 pct a week ago, and 32 pct a month ago
  • 43 percent odds of a 25 basis point hike, down from 56 pct on Friday, 46 pct a week ago, and 64 pct a month ago

June 15th meeting (even money on 50 basis points in BOTH May and June):

  • 53 percent odds of 50 basis points hikes in BOTH May and June, up from 35 percent on Friday, 27 pct a week ago, and just 9 pct a month ago
  • 44 percent odds of a 50 basis point hike at EITHER the May or June meeting, down from 54 percent on Friday, 49 pct a week ago, and 38 pct a month ago
  • 3 percent odds of just 25 basis points in May and June, down from 11 pct on Friday, 23 pct a week ago, and 52 pct a month ago.

December 14th meeting

  • 43 percent odds of Fed Funds at 2.25 – 2.50 pct, up from 26 pct on Friday, 9 pct a week ago, and 2 pct a month ago.
  • 31 percent odds of Fed Funds at 2.00 – 2.25 pct, down from 42 pct on Friday, about the same as a week ago (27 pct) and up from a month ago (9 pct)
  • 18 percent odds of Fed Funds at 2.50 – 2.75 pct, up from 4 pct on Friday and less than 1 pct odds a week and month ago.

Takeaway (1): Markets took Powell’s comments today as “new news” about the pace and scope of future rate hikes. He was certainly blunter about his views regarding the merits of 50 versus 25 basis point moves as well as explicitly saying he could push Fed Funds above the neutral rate. The second bit is significant, because investors know that means inverting the yield curve. That’s most likely why the odds of Fed Funds ending the year at 2.25 – 2.50 percent rose so much today; 10-year Treasuries yield 2.29 percent, after all.

Takeaway (2): Building on that point regarding 10-year Treasuries, we think it is significant that yields rose today to 2.30 percent from 2.15 pct on Friday. They could have taken Powell’s comments and translated them as increasing the risk of a US recession. As we discussed last week, history shows that when 2-year Treasuries (informed by market perceptions of Fed rate policy) yield more than 10-years (the neutral rate), recession usually follows. Instead, markets took Powell’s tough tone as signaling that the risk of persistent inflation is growing. We continue to recommend shortening bond portfolio durations.

Sources:

FactSet Earnings Insight (p. 22): https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_031822.pdf

CME FedWatch: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html