Despite year-to-date losses for stocks, the estimated earnings of the S&P 500 companies for the next 12 months have continued to climb as shown below:

 

NO LETUP IN FORWARD EPS ESTIMATES

Source:  Bespoke Investment Group

This divergence between the trend in forward estimates and where the market trades is uncommon but not totally unexpected given strong economic growth with tightening monetary policy.  Higher risk-free rates, less liquidity, and higher inflation are serving to reduce the value of stocks even though the continued upward revisions to EPS suggests few analysts are getting worried about growth (for now).  It also suggests a dovish pivot from the Fed could spark a serious rally in equities driven by a recovery in valuations.  Conversely, further hawkishness that risks recession would cause EPS estimates to roll over, reflecting an economic slowdown.  The basic takeaway is that the price declines were fueled by P/E multiple rather than earnings compression.

Stock market bears say the primary reason the stock market has risen so sharply over the last three years is because of record-high stock buybacks. Without buybacks, they say the market would have been up ever so slightly.  Analysts at Goldman Sachs project $1 trillion in buybacks this year compared to $881.7 billion in 2021 and $519.8 billion in 2020.  But it is not obvious that buybacks have been distorting the stock market recently because the value of the stock market has been climbing at a pace similar to buybacks.

JP Morgan research decomposed the S&P 500’s earnings per share (EPS) down to its growth drivers:  revenue, profit margins, and change in share count.  If buybacks were having a material impact on earnings per share, then the impact of the change in share count would be significant.

JP Morgan’s analysis found the change in share count had a very modest impact on EPS in 2021.  In fact, from 2001 to 2021, on average, the change in share count was responsible for just 0.3% of the 6.0% annual EPS growth during that period.  So clearly it is not just share buybacks driving stock prices.  Aggregate demand for shares has been high and buybacks have had only a minor impact on pushing stock prices higher.

 

THE FED HAS TURNED SHARPLY HAWKISH

 

Fed rate hikes are meant to slow the economy by reducing demand thereby easing inflationary pressures.  Fed rate hikes take several quarters to impact the economy but have already had an impact on the markets.

The Fed turned sharply hawkish over the last six months.  In August 2021, only one rate hike was priced in for 2022.  Now, the market expects seven 25 basis point hikes this year.  In addition the Fed has signaled it will shrink its balance sheet – a process known as quantitative tightening (QT) – as early as June.

The yield curve is not yet inverted (short maturity rates higher than long maturity rates) but is getting closer.  The current spread between a 2 year Treasury and a 10 year Treasury, a common comparison, is only 0.15% (15 basis points) – close to flashing a warning sign.

It is true that before every recession the yield curve has inverted, but not all yield curve inversions have resulted in a recession.  The warnings usually come between a year and three years before a recession starts, and the market can rise sharply during the waiting period (1989, 2005).  So far the Fed has raised rates once so this really remains an issue for 2023 or 2024, not today.

Some investors fear a Fed policy error.  We have a strong economy indeed, but some level of Federal Reserve monetary policy shock will derail it; the question for investors is whether markets realize how big the tightening juggernaut is… or if inflation will reverse and allow stocks to dodged the large caliber hikes that the Fed now seems ready to fire.

Rather than warn of recession, an inverted yield curve is better read as a sign to investors that the economy is getting late in its cycle.  The Fed is tightening policy to slow the economy.  It is important to note the Fed has engineered multiple soft landings in history, so we think it is premature to assume a policy mistake.

Can stocks rise during a tightening cycle?  Yes they can, and often do.  Gains are lower than when the Fed loosens policy but with corporate profits so strong it is very possible stocks advance further, in our opinion.  The advance in prices over the last two weeks is encouraging.  It is impossible to know, but maybe the correction is over despite a tough backdrop for equities:  war, inflation and the Fed.

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Real Retirement Solutions

designed to improve
  • Wealth Preservation
  • Management of Risky Assets
  • Peace of Mind

This is achieved through an ongoing assessment of market risks given your specific financial situation and goals.

Get Started

Professional Expertise

Leadership Team

Richard Furmanski

Richard Furmanski

CFA

has been a portfolio manager and analyst for over 35 years. He manages conservative, tax-efficient portfolios for both pre-retirees and retirees. His lower risk approach appeals to investors who want less volatility and competitive risk-adjusted returns.

View full bio

Mary Ellen Adam

Mary Ellen Adam

Director of Operations

has been in office administration for over twenty years. Her experience includes customer service, firm operations, and office administration. She interacts with our clients on a day-to-day basis and handles any requests that may arise.

View full bio

Frequently Asked Questions

If you can't find the answer to your questions here, feel free to give us a call at 847-847-2505

Do you manage both stock and bond portfolios?

Yes. We build a portfolio of conservative, high-quality stocks and hold them for the long-term. The average holding period is 4 – 5 years. Our focus is on stocks that are suitable for retirement portfolios.

Our high-quality bond portfolios are designed to provide both income and stability of principal. Bonds provide the anchor for balanced accounts (those holding both stocks and bonds).

What is your investment philosophy?
We take great care in purchasing only high-quality stocks and bonds intent on a multi-year holding period. Portfolio turnover and taxable realized gains are modest in comparison to other active managers. We do not time the market but will become more defensive, in terms of stock holdings, when market conditions warrant.
Will the portfolio be managed in accordance with my financial goals?
Yes. Each of our clients has a custom-tailored portfolio. These custom portfolios are designed to meet specific client objectives with a thoughtful approach to specific constraints such as risk tolerance. And as each client’s situation changes, the portfolio does as well. There is no cookie cutter approach.
What kind of expertise do you have and how can that help me in difficult markets?
We have been working with high-net-worth clients like you since 1982. Over that time we have helped them to navigate several bear markets and financial crises (including the stock market crash of 1987). We hold the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations.
Are you sensitive to taxes when managing portfolios?
Yes. Our holding period for an individual stock averages 4 plus years which means our turnover is low and realized gains can be carefully managed. Further, where possible, we tax loss harvest small losses as a way of offsetting gains taken elsewhere in the portfolio.
How have you performed?
Results will differ by client and the level of customization but we have provided competitive investment returns for many years.
How do you charge for your services?
We charge a management or consultant fee based upon the size and level of customization of the account. As the account grows, we benefit together.

Recent Commentaries

Stay up to date with all of our latest comments and analysis.

January 2025 Market Commentary

The S&P 500 has had a 20%+ return for two years in a row. It has only rallied 20%+ in back-to-back years three...

November 2024 Market Commentary

With an YTD gain of 22.1% through yesterday, the S&P 500 is on pace for its second annual 20% gain in a row. Surprisingly, that has only happened two other times:  first, three times in a row from 1954-56, and second, four years in a row from 1995-98.  However,...

October 2024 Market Commentary

China may be our biggest adversary, but the health of their economy and markets are important to the U.S. They are a major trading partner and their markets contribute to overall global stability. Chinese policymakers are finally alarmed enough to shift out of low...

September 2024 Market Commentary

August was a roller coaster for stocks. Moves lower in a roller coaster market can be terrifying, and in the first three trading days of August, investors had to contend with economic data showing what looked like a sharply decelerating economy and the unwind of the...

Monthly Updates

November 2024 Mid-Month Recap

As we mentioned in previous commentaries, Barron’s Big Money Poll represents the thoughts of large U.S. investment advisors. Their opinions and forecasts are what is discounted in stock and bond prices.  We think that is important. The recent fall edition of the Poll...

October 2024 Mid-Month Recap

INVESTORS BALANCE SHEET – PROS AND CONS Here are a few of the pros and cons investors should consider when forming an opinion of the stock market.  It is always important for investors to look at both sides of the argument even if they feel strongly in one direction,...

As a current or near term retiree you have real concerns…

We provide dedicated solutions
Contact Us