We want to give a quick update on where the market stands as we head into a very important week of corporate earnings. The S&P 500 has kicked off 2023 with a solid start, rising 4% before giving up some gains last week. In this episode, we show a few charts that highlight the technical macro backdrop of the S&P 500, which should help the index finally break its downtrend in 2023. One chart goes back to last January when the S&P 500’s previous rally attempts failed to break through the 200-day moving average. Today, the 200-day moving average is at 3971. These failed rallies last year in March, April, July, and December were due to sharply rising interest rates and a big US dollar rally. The good news is that the headwinds we saw last year have largely subsided. On another chart, you can see that the 10-year treasury yield has fallen to 3.5% and is in a pronounced downturn. On the third chart, you will see that the US Dollar index is also in a pronounced downturn. The backdrop for inflation has also improved over the last year. Another chart shows that the recent peak in year-over-year inflation estimates for 2023 is coming down. With yields, the US Dollar, and inflation all trending down, we’re watching carefully to see if the market can finally break through and hold at the very important 200-day moving average number. We are watching and hoping for what should be a less volatile year as we move forward.
We seem to be having some technical strength in the market where we’ve created a bottoming process. Last year it was all about inflation, the Fed’s response to inflation, and rising interest rates. Since the last Fed meeting, the market has seemed to be looking at earnings. Something we thought was important to look at was where our earning season could be going and where the market expects it to be. A chart shown in this episode shows the change in earnings expectations to start the year off. Only 10% of the S&P 500 earnings have been reported and we will get a third of the S&P report this week, which should show some market-moving data. While the market seems to be bottoming, earnings are coming out a little bit weaker than expected. Since the beginning of this year, expectations have dropped by over 2%, showing negative earnings growth for the fourth quarter at -2.9%. That kind of conflicts with the revenue expectations of +4.1%. That means inflation is hitting a company’s earnings and the market directly. Prices are higher and there are more sales, but you also have higher costs so that’s bringing earnings down. If you strip it down and look at the specific sectors, you can see that the bulk of the earnings positivity comes from two sectors. Energy had 61% earnings growth, and industrial had over 40% earnings growth. Those two sectors are pulling up the market and that is where you saw a lot of strength last year. We need to see a broadening of that strength for this market to find a sustainable bottom and then move past this inflation and Fed-led market into an earnings-led market. At the end of the day, companies make money and they give that money to shareholders. That’s what calls the price to go up sustainably. We’re going to need to see those earnings improve. We will get a lot of data this week and we hope we’re going to see some positivity, which could cause the market to rally.
Last year we saw a record $563 billion in dividends being paid to shareholders. That is a great sign because, during the pandemic, a lot of companies had to cut dividends or pause them. We were glad to see companies get back on track with rising dividends. It’s only January, but we’re on pace to see another record year for dividends. If the dividend yield stays the same, there’s a chance that numbers will surpass those from 2022, which is a great sign. Historically, dividends have accounted for about 60% of the S&P 500’s total return. As you can see in a chart shown in this episode, one factor is from 2010 to about 2021, known as the QE era, we saw dividends only make up 26% of the S&P 500’s total return. As we transition from QE to QT, it’s going to be interesting to see if dividends start making near that 60% range or at least find a nice middle between 26% and 60%. Right now, companies are paying out 33.4% of their payouts, which is historically low. Typically, they pay out around 48%. Last year was a record year, but it seems like 2023 is well on track to surpass that. We are hoping to see dividends become more of a factor going forward.
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