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Behind the Camera


While the market cap weighted S&P 500 may be up 8% on the year, the equal weight S&P 500 is unchanged, the Dow flat, and the small cap Russell 2000 down 1%.  These laggards better represent the current macro backdrop with the economy on edge of recession, politicians’ saber-rattling over the debt ceiling, earnings seeking a floor, and the Fed Funds now above inflation levels. The strength in the Big Tech stocks supporting the index stems from oversold situations last fall, Zuckerberg’s industry call for more industry efficiency with dramatic layoffs and restructurings, as well as the hype around AI.  The headline index rally is well ahead of the rally elsewhere and may retreat as the soggy summer seasonals take hold.  After that, we should exit the year with true escape velocity. We do not foresee a systematic financial crisis but given the mix of anxiety and volatility within the regional banks, we wouldn’t go bargain shopping there yet.  They are too vulnerable to bear raids.  Investors contemplating holding stocks for only the next three months shouldn’t.  Investors contemplating owning stocks for the next three years… should buy all they can.

Click here to watch the Yahoo! Finance Live Interview

The Full Story:

Before every media appearance, I take time to distill my thoughts down into digestible soundbites.  On Friday, I appeared on Yahoo! Finance Live with Rachelle Akuffo.  To mix things up in this week’s Strategic Insight, I thought I would invite you into the green room and simply share the notes I created to prepare for that segment.  Ready… Action!

Talking Points for 5/12/23 Yahoo! Finance Appearance

Markets have gone nowhere over the past year.  S&P 500 closed at 3930 on May 12th of 2022 and trades at 4105 today.  Entering seasonally weak period (May – October) with the Fed tight, recession on delivery, and politics disorderly.  Using a stoplight analogy, the government is flashing red, the economy is flashing yellow, while corporate earnings are flashing green, thanks to executive acumen.  It’s a good thing we invest in companies and not governments!

The Fed:

Interest rate hikes now on pause – without conviction

Quantitative tightening now on pause – without conviction

($400B in QE after SVB programs announced, $200B QT since)

Debt Limit:

Biden and friends will need to deal with the debt ceiling within the next 5 days while everyone is in DC.  Using the 14th Amendment to claim the debt ceiling is unconstitutional would create a constitutional crisis.  Not happening.  Deal or delay to the fall for budget season are the only options.

The deficit ran $1.9 trillion over the past 12 months.  After June 1(?) spending will be restricted to tax receipts which are plenty to cover interest payments… therefore no default on tap, just rationing elsewhere.

2011 Analog: Tea Party ran over Obama with the Budget Control Act which cut spending by $100 billion over the following few quarters.  Spending didn’t rise above the pre-Act level until 2014.  S&P 500 fell 15% in Q3, erasing the gains for the year, and finished the year flat—not because of the credit downgrade everyone remembers, but because of the tight fiscal conditions triggered by the austerity Act.


Now surprising to the downside


April .4% monthly number weaker than whispered, 4.9% annual less than 5%.

Shelter, Used Cars & Vehicle Insurance drove the advance, otherwise the number would have been close to 0% month over month.  Vehicle inflation a bit of a head-scratcher with all of the incentives on offer and price downticks at major auctions.  Housing really drove the number… but it lags badly.


Fed favorite core services ex-housing measure has decelerated by half since

January, now running about 2.8% annualized… pretty close to target.


Running 2.3% annualized, lowest level since January 2021.

No June Hike!

2-year yield peaked at 5.05% on March 8th, sits at 3.9% today.

Futures pricing in less than 10% chance of a hike in June.


Clearly decelerating, with the bank credit crunch draining the micro economy… year-to-date bankruptcies are now the highest they have been since 2010.  The macro economy dealing with wall street financing faring better… but credit tightening will bite there too. This is what the Fed wants.  The US money supply is down 5% over the past year, that’s the opposite of money creation.  Initial Jobless claims surprising higher.  The labor market is clearly softening.


According to the analysts, this quarter represents the trough for absolute earnings after peaking in Q2 of 2022.  The drawdown estimated to be 11% from the top has proven to be only 7% at this point.  Companies have done a MUCH BETTER job managing profit margins through this period than analysts expected!

If that continues and the economy rebounds after a shallow recession, S&P 500 earnings could hit $250 in 2024.  Additionally, falling inflation and interest rates would support a higher P/E multiple (19x up from 18x).  The two combined get us to 4750.  We are at 4100 today.

Then consider what’s possible further out as corporate reorganizations, labor rationalizations and AI installations contribute to big operating leverage.  Analysts predict $275 for 2025…multiply that by 19 and you get to 5225, or 27% higher than today.  Which is well within the range of average post-recession returns.

S&P 500 Earnings Results/Estimates:

Q1: -2% actual earnings growth vs. -7% estimates. 80% of reporting companies beat estimates. Those that beat had upside surprise of 7% Even with only 3.9% Revenue growth – weakest since Q4 2020

Q2e: -5.7%

Q3e: 1.2%

Q4e: 8.5%

2023e: 2.3%, Estimates have RISEN lately.

2024e: 10.3%, Estimates have RISEN lately.


Just entered the historically weakest 6 months period of May through October.

Outside of Big Cap, tech-boosting headline indices, 2023 returns are essentially zero.

Likely due to a 5-10% pullback for the S&P somewhere over the next few months as tech tires out and recession arrives.  Once we get a rise in the unemployment rate or a cut in interest rates, the recovery rally should begin in earnest.


S&P 500: 18.0x

S&P 400: 13.2x

S&P 600: 12.5x

World Ex-USA: 12.8x


30% of retail investors bullish, neutral territory and above my “get excited” level of 20%.

Enjoy your Sunday!

David S. Waddell  

CEO, Chief Investment Strategist

David S. Waddell

David S. Waddell

CEO, Chief Investment Strategist