Bond Market Woes, And Forward S&P 500 Earnings Weakened A Little

As of 5/6/22:

• SPY YTD return: -13.13%
• Barclays Aggregate (AGG) YTD return: -10.42%
• Standard 60%/40% benchmark portfolio return: -12.05%

Despite the headlines this week, the S&P 500 fell -0.21% the last 5 trading days, for its lowest weekly loss of the last 5. Here’s the chronology with the ending 10-year Treasury yield each week:

• 5/6/22: S&P 500 weekly loss of -0.21%, 10-year Treasury yield closes at 3.13%;
• 4/29/22: S&P 500 weekly loss of -3.27%, 10-year Treasury yields closes at 2.88%;
• 4/22/22: S&P 500 weekly loss of -2.64%, 10-tear Treasury yields closes at 2.90%;
• 4/15/22: S&P 500 weekly loss of -2.39%, 10-year Treasury yield closes at 2.83%;
• 4/8/22: S&P 500 weekly loss at -0.67%, 10-year Treasury yield closes at 2.71%;

The 5-week loss for the S&P 500 is about 9%, while the increase in the 10-year Treasury yield for that some period is about 42 basis points. Are the two related? Is correlation causality? While there are a lot of reasons being tossed about today about the stock market weakness, that 42 bp increase has to be close to the top of the list. Just in the last 5 weeks that is a 15% “relative” increase in the 10-year Treasury yield. High grade corporate bond duration near the end of 2021 got above 9 years (watching the Bloomberg data), and while it’s a little lower now, that still implies a 9% drop in the value of the ETF or fund for a 100 bp parallel move in interest rates.

According to one of the Refinitiv reports emailed to me every week, Friday’s April ’22 jobs report was the 12th straight month of +400,000 net, new, jobs created. That’s pretty impressive. The report went on to say “leisure and hospitality” was the strongest sector creating +78,000 jobs. So, are the original pandemic-driven job losses like restaurants finally re-hiring those workers?

The next FOMC meeting statement is June 16th, 2022. Jay Powell has already said 50 bps is planned. Not much mystery left, but we do have April inflation data, and the the May jobs report and possibly May inflation data, before the next June meeting. Crude oil is not really weakening, but it isn’t making new highs either. The high end of the current Fed funds target is now 1% and Jay Powell has said that “neutral” is at least 2%. The late ’18 decade high for the 10-year Treasury yield was 3.23% – 3.24%. That was the very end of Jay Powell’s last monetary policy tightening round.

In late 2010, early 2011, the 10-year Treasury yield managed to get up around 3.50% – 3.75%. The rest of the decade was well below that range.

S&P 500 earnings data:

• The forward 4-quarter estimate this week slid to $234.44 from $234.97 last week, the first sequential decline since the week of March 25th, 2022;
• The PE ratio on the forward estimate is 17.5x, down from 22x on 12/31/21;
• The S&P 500 earnings yield this week is 5.69%, the exact same print as last week’s 5.69%;
• The Q1 ’22 bottom-up estimate rose to $54.41 versus $53.03 last week and $51.99 two weeks ago;

How have full-year 2022 expected sector growth rates changed since 12/31?

S&P 500 Sector Growth Rates

In last week’s earnings update it was noted that with Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) reporting their March quarter results on Thursday night, the earnings revisions might not get fully incorporated into the consensus estimates until this week, and that appears to be the case with Amazon and Consumer Discretionary.

Note the decline in Consumer Discretionary’s full-year 2022 EPS growth rate in the last two weeks. Amazon and Tesla (NASDAQ:TSLA) are the two biggest sector weights in “CD”. Consumer Discretionary’s weight in the S&P 500 (market-cap weight) is slightly over 11%.

Apple’s quarter didn't seem to have the negative effect on tech’s full-year 2022 EPS growth rate that was initially thought.

Summary / conclusion: The difficult market is eventually going to results in sell-side analysts pulling in their horns on expected EPS growth within the S&P 500, although the healthy job growth and economic data is probably mitigating that tendency right now. It will happen eventually though.

The $64,000 question today is how far away is a recession? JP Morgan this week noted that the chance of a recession in 2022 is probably 15%, while that probability grows in 2023 to closer to 30%. I thought Goldman put out a note that recession odds are 33% as we exit 2022.

Housing is no bubble; it’s all about supply. Brian Wesbury over at First Trust has been writing about that topic almost since the 2008 Crisis ended.

After trying to buy a house the last 2 -3 months, I’ve stepped away after being outbid on every home. Those who bought homes at the top in 2008 took years to break even. I don’t have that much runway left. Maybe higher rates will restore some rationality to buyers. (Housing and homebuilders are part of the consumer discretionary sector, too. As is the auto sector.)

No companies reporting this week hold any interest. The next big reports will be Cisco (NASDAQ:CSCO) and Walmart (NYSE:WMT).

Take everything you read here with substantial skepticism. Past performance is no guarantee of future results and none of this is a recommendation to buy or sell. The capital markets change quickly, both positively and negatively. If commodities crack and correct substantially, including energy, although this post makes that seem less possible, I think it could give Jay Powell some breathing room.