Fed Funds, S&P Earnings, Russian Stocks

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Fed Funds, S&P Earnings, Russian Stocks

Three “Data” items today:

Topic #1: The latest Fed Funds Futures-based probabilities for FOMC interest rate policy this year (link to CME FedWatch tool below):

  • For the upcoming March 16th meeting, Futures still give 33 percent odds of a 50 basis point rate hike. That is higher than Friday’s 22 percent reading, remarkable given the selloff in US stocks today.
  • For the June 15th meeting, Futures currently put the highest odds (44 percent) of Fed Funds at 1.00 – 1.25 percent, up from a 38 pct probability last Friday. This implies at least one 50 basis point rate hike between now and then. The odds of three hikes of 25 basis points (i.e., Fed Funds of 0.75 – 1.00 percent) fell from 52 percent on Friday to 40 percent today.
  • By the end of the year, Futures are putting the highest odds on Fed Funds at 1.50 – 1.75 percent (32 percent), virtually the same as the odds (30 percent) of rates at 1.25 – 1.50 percent. The odds of the former (higher) outcome fell today from Friday’s 34 percent, and the odds of the latter (lower) outcome rose from Friday’s 22 percent.

Takeaway: the action in the Futures market today seems to be saying that the Fed will still aggressively raise rates in the first half of 2022 but may ease up past the June meeting. This is a notoriously choppy market over any given day, so we’re not going to call this an inflection point in investor psychology just yet. If there is a diplomatic solution to the Russia – Ukraine conflict in the coming weeks, the odds of more hikes in the back half of 2022 could well start to rise again.

Topic #2: A quick update on Wall Street’s near-term estimates of S&P 500 earnings power now that we’re essentially done with Q4 financial reports. With 84 percent of S&P companies having reported earnings:

  • Q4 2021 aggregate index earnings are coming in at $55.16/share. That is a new all-time record, 2.4 percent higher than Q3 2021 ($53.88/share). That Q4 actual result is also 7.6 percent better than what Wall Street analysts were looking for at the end of 2021 ($51.25/share).
  • Street analysts are cautious on Q1 2022 earnings, with an aggregate estimate of $51.85/share (6 percent below Q4 2021 actual). Despite Q4’s upside surprises, analysts have actually trimmed their Q1 2022 numbers slightly. At the end of last year, they had $51.90/share.
  • Analysts are similarly cautious on Q2 2022, with an aggregate estimate of $55.44/share. That is scarcely above (+0.5 percent) Q4 2021’s actual results.
  • The Street only gets really bullish on S&P earnings in the second half of 2022, with a Q3 estimate of $58.39/share and a Q4 of $59.72/share. Those are 6 and 8 percent above Q4 2021’s actual result.

Takeaway: when exogenous shocks or Fed policy uncertainty hit markets, the only offset that can counterbalance those concerns is confidence in current and one quarter forward corporate earnings power. That’s why we so quickly crawled out of the March 2020 hole created by the Pandemic Crisis, and also why that rally continued in 2021. Based on the analysts’ numbers we just showed you, we are clearly missing that piece of the puzzle in Q1 2022, since the Street believes Q4 2021 was a near-term peak for S&P earnings power. We’d take the over on what analysts are looking for in Q1 or Q2, but this year’s dreadful market action says it’s too early to lean on that belief.

Topic #3: A grab-bag of information about Russian equities:

  • Russia was 2.8 percent of the MSCI Emerging Markets Index as of Friday’s close. In terms of weightings, that was in between South Africa (3.6 percent) and Mexico (2.0 percent).
  • MSCI Russia (ETF Symbol ERUS) is, no surprise, heavily weighted to Energy (49 percent) and Materials (22 percent). Financials are the third largest allocation, at 17 percent. The largest single-stock weightings are to Gazprom (19 percent), Lukoil (14 pct) and Sberbank (12 pct).
  • According to the iShares website, ERUS has an MSCI ESG Fund rating of BBB. This is higher than Mexico (BB), which as noted has a similar weighting, and the same as China (BBB), which has the largest weighting in EM (32 percent).
  • MSCI Russia (using the ERUS ETF) bottomed during the Pandemic Crisis on March 18th, 2020 at $22.00. It was down 10 percent today and closed at $33.35/share, still 52 percent above those 2020 lows.

Takeaway: Russia’s equity market cap is small enough (and shrinking) that it does not have much of a direct effect on the widely held MSCI Emerging Markets index. For clients interested in bottom feeding on Russian equities, we’d suggest holding off for now simply due to uncertainties around further sanctions.


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

FactSet Earnings Insight: https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_021822.pdf