It will be interesting to see how much of the recent move in Treasury yields is a default premium being built into the asset class versus worries over economic growth that doesn’t appear to be softening much, and inflation which remains stubbornly high. It sure seems like the latter, more than the former, as you’ll read below.
It wasn’t the PCE inflation data or the PCE deflator that was the surprise on Friday morning, May 26th, 2023, but the jump in personal spending of +0.8%, versus the +0.4% expected.
In early February ’23, Raphael Bostic, the Fed Bank of Atlanta Governor, gave a very candid interview on CNBC and said – very specifically and unambiguously – that the FOMC and Jay Powell were not targeting wage inflation, but rather “demand,” and given the unexpected upside surprise this morning in personal spending, the 500 basis point increase in the Fed funds rate in the last year is not having very much impact on “demand.”
Fed funds futures (CME FedWatch tool) ended Friday, May 26th, 2023 now show a 70% chance of a 25 basis point hike on June 14th, ’23, the date of the next Fed funds meeting. The source can’t be remembered or recalled, but someone noted on Twitter this week that the chance of a 25 bp hike in the fed funds has jumped from 13% earlier in May to 70% today.
S&P 500 D7ata
- The forward 4-quarter EPS estimate for the S&P 500 actually increased this week to $224.71 from $224.38 last week and $228.38 to start 2023;
- The PE ratio ended this week at 18.7x versus last week’s 18.7x and 17x as of early Jan ’23;
- The S&P 500 earnings yield ended the week at 5.34% versus last week’s 5.35%;
- The S&P 500 closed this Friday at 4,205 versus last week’s 4,191 despite all the cries of a “runaway market”;
- The bottom-up estimate for Q1 ’23 ended this week at $53.25 versus the $50.63 estimate just before earnings started being reported in mid-April ’23;
- The S&P 500 is still looking for just 1% – 1.5% EPS growth for 2023, even with the strong Q1 ’23 earnings results.
May Jobs Report Next Week
Briefing.com shows their own consensus and expectations for the May nonfarm payroll report next week. (Bottom of the table.)
Jobless claims have been volatile for the last 3 – 4 weeks.
Would love to “call” a number for May jobs, but it’s a fool’s game for an advisor. Assume consensus with a lean, one way or the other, and I’d say that is “consensus over” versus “consensus under.”
Given the bond market’s action in the last few weeks, it would be nice to have a weaker number.
Conclusion
During June, investors will hear from Nike (NYSE:NKE), FedEx (NYSE:FDX), Oracle (NYSE:ORCL), and even Micron (NASDAQ:MU) all with May fiscal year ends, or like Micron, a quarterly month end.
With such a strong consumer, given today’s numbers, some retailers are starting to miss on the top end, even though the country’s largest retailer, Walmart (NYSE:WMT) beat on revenue and EPS last week. Don’t be fooled into thinking all retail misses are the economy: management will try and make that case, retail is like technology, i.e., if you don’t execute, you’re sunk.
This blog hasn’t talked about it in a while, but the S&P 500 earnings yield is really remaining rock solid in the 5.25% – 5.5% range, but at 5.34% this week, it’s at its low print for 2023. The high S&P 500 earnings yield for the year was the week of March 10, ’23, or the Silicon Valley Bank collapse week, and that was 5.74%, only beaten by the January 6th, ’23 earnings yield of 5.80%.
Last year’s high earnings yield was 6.50% around October 14th, ’22, and for most of ’21, the earnings yield was below 5%. The point is – at its current level, around 5.25% – 5.50%, it reflects a healthy level.
Looking back to 2020, right around the Jackson Hole gathering, the earnings yield hit 4.15%. (This blog should really do a more in-depth look at EY. )
Take all this with considerable skepticism. It’s not advice, and it’s a person’s opinion. Past performance is no guarantee of future results. All S&P 500 earnings data is sourced from IBES data by Refinitiv. This information may or may not be updated, and if updated may not be done in a timely fashion.