- August 26, 2022
- Blog , CJ Lawrence , The Portfolio Strategist - Terry Gardner
Turning the Page on Summer 2022, Looking to 2023, Terry Gardner, C.J. Lawrence Commentary 8.26.22
Hey everyone. It’s Terry Gardner from C.J. Lawrence coming to you on Thursday, the 25th of August, after a few days out of the office. Wrapping that up. Apologize, the audio quality’s probably not so good. The video is moving around in the wind, but heck it’s summertime. So why not?
Terry Gardner, Jr. (00:19):
So wanted to come to you with a little bit of market commentary. Drawing some parallels between the ocean and the markets, right? Because everyone loves to spend time in the ocean. It’s invigorating. It’s exciting, it’s energizing. But at the same time, we understand that we have to manage the risks of the ocean. There’s rip currents, undertows. This year, certainly here on the south shore of Long Island, we had a lot of encounters with sea life. More than we’ve seen in June and July ever in our history. I’m talking about sharks and they feed in the mornings and in the evenings. So managing risk. Not swimming during those times. Not swimming during periods or where you see schools of bait fish. Just common sense, risk management in the ocean.
Terry Gardner, Jr. (01:05):
Same thing in the markets is what we do. We risk manage. We enjoy it. We participate. It’s exciting, invigorating and challenging, but we manage those risks. We’re going to talk a little bit more about managing risks a little later in the video. First, wanted to cover three topics. First being, we just wrapped up second quarter ’22 earning season. There was a lot of concern going into those earnings as to how they would be. We want to talk about the results.
Terry Gardner, Jr. (01:31):
Secondly, as we turn the page on summer, which is unfortunate, I mean, who wants to leave this? But this is the time of year where investors start to look at 2023 expectations and forecasts to do valuation work. So let’s take a look at how 2023 is shaping up in the analyst community. Thirdly, we’ll talk about a couple of those macro risks that I mentioned and then we’ll summarize.
Terry Gardner, Jr. (01:57):
So first off with regard to earning season, second quarter was pretty good. Earnings were up about six and a half percent and expectations had been up that they would be up about five and a half percent. So that was a pretty good improvement. 75% of the companies that reported, reported results that exceeded analyst expectations. So upside surprises. So now we’ve probably got about 97% of the S&P 500 having reported. Looks like the numbers were pretty good. So the market kind of dodged a big challenge there, given that going into the earning season there were a lot of concerns that earnings were going to fall short.
Terry Gardner, Jr. (02:38):
Secondly, leading to my next point about earnings, next year’s earnings. As we’re turning the page, looking to value companies on next year’s expectations. I think this is going to be more important than ever because what we’ve seen with the market multiple, the price earnings multiple in the S&P 500, we’ve seen it fall from about the beginning of the year around 20 to about 15 and a half just this spring. Then it’s recovered to about 18, 18.2, where it currently stands. It’s hard to make a case as the Fed continues to raise interest rates that the market multiple can go much higher from here. So if the stock market is going to continue to advance, it’s likely going to have to be on a comfort level that earnings are going to come in within expectations.
Terry Gardner, Jr. (03:25):
So where in the market are earnings expected to be strong? We put earnings expectations into three buckets because what we like to see is consistent earnings growth. So what we’re seeing is a couple of sectors where this year was particularly strong, but next year is expected to be weak. We see that in energy and materials where earnings are expected to drop 15% and 17.5%. That’s understandable given a lot of people… I got a visitor in my video, that guy should become a client.
Terry Gardner, Jr. (03:56):
Anyhow, that’s expected given that a lot of analysts don’t expect that commodity prices can stay high for much longer. Then healthcare has had kind of a flat expected earnings growth for this year. Expected to drop about 3% next year, something to watch. There’s another bucket that we like where it’s a rebound year, where their earnings were kind of soft last year or in 2022, sorry, the current year, but are expected to rebound next year. So coming off a low base, delivering high earnings for next year. Communication services is one of those. Earnings are expected to be down 8% this year, but rebound up 17% next. Consumer discretionary, another one down 7% expectations for this year, but expected to have 40% earnings growth in that sector next year. That’s something to watch. Then financials, up 15% next year, down 13% this year.
Terry Gardner, Jr. (04:56):
If I can look at my last bucket without dropping my laptop we’ll have success here. I did. Two up years, that’s what we like to see the final bucket. Sectors where they’re delivering strong earnings growth this year and expected to deliver strong earnings growth next year. Technology up 10% next year, up 7% this year. Good track record. Industrials is really interesting, expected to be up 18% next year off a 32% growth base this year. So industrials, two strong years of earnings growth. Real estate and utilities, both of them positive earnings growth this year, positive earnings growth next year. Very consistent earning streams in those two sectors.
Terry Gardner, Jr. (05:40):
So that leads us to the third point, which is what could create additional risk to those earnings? We mentioned in the very beginning of the discussion about global macro. We’re still watching the Eurozone. European growth, earnings growth looks soft. GDP growth looks soft right across the Eurozone. So that’s something we’re going to have to watch as the war continues in Ukraine, high energy prices hit those economies particularly hard.
Terry Gardner, Jr. (06:08):
At the same time, we’re seeing weak China and I would suggest even weakening China. So besides zero COVID policy, which has really clamped down on a lot of their manufacturing, their real estate sector is suffering from a bursted bubble. As you remember from previous videos, we discussed the importance of the real estate and the construction industries in China to their economy. 15% of their GDP is generated from real estate development. About 30% of their GDP is tied in some way. 18% of urban employment in China is tied to real estate. So remember, there’s a number of lenders that are going into default. Credit is tightened there and that sector is struggling. That’s going to have an impact on that economy.
Terry Gardner, Jr. (06:57):
Bottom line, if you’ve got China slowing and you’ve got Europe slowing, it’s likely that the US is going to slow too. Which leads me to my final point on macro, which is… And on growth is if the US slows, it’s probably not a bad outcome for the markets. It’s expected that the economy’s going to slow. The Fed’s trying to put the brakes on at the lower end of the yield curve and it’s expected that GDP is going to come in. That’s the expectation is that that is going to reign in inflation. We’re watching to see how that plays out.
Terry Gardner, Jr. (07:38):
At the same time, that probably helps the Fed at some point, perhaps to ease off. But a slowing economy, even a recessionary economy is probably not all that bad for the stock market so long as we don’t have a crisis. So what I mean there is, and we’ve done some work. We’re happy to share that with you. I’m not going to go into it in detail in this video, but if you have recessionary periods that aren’t coincident with a crisis, a financial crisis, a geopolitical crisis, similar to the housing crisis that we had in the ’07. ’08 financial crisis that led to recession. If you don’t have that coupling, you just have a typical business cycle recession, markets do very well in the 12 months after. So that’s something we’re going to talk about some more in the coming videos.
Terry Gardner, Jr. (08:25):
Finally, wrapping it up. Our strategy continues to follow on the three S’s that we’ve been talking about, which are secular growers, scarcity, and the third being enterprise subscription businesses, though that strategy has served us well and will continue. So we think the market probably tries to digest what the earnings outlook is going into next year, combined with the actions of the Feds and these geopolitical macro risks. So it’s really a challenging environment for investors, but if you stick with those three S’s, you’re likely to outperform.
Terry Gardner, Jr. (09:05):
We’re going to wrap it up there. We’ll come back to you from the office with some more details and some more market data. Hope everyone’s had a great summer and happy to take your questions or get back to you with any of the data that we discussed in today’s video. If you want to reach out to me at 212-888-6403 or tgardner@cjlawrence.com.
Hope everyone has a great weekend. Thanks.