Key Metrics  Media

The MM US Stock Fundamental Index incorporates comprehensive US economic indices and indices regarding enterprise profitability. Rising MMFI for the US stocks indicates better fundamentals while falling indicates weaker fundamentals.

Components of MMFI for the US stocks include US corporate profits after tax, heavy weight truck sales, US credit spread, etc. Weights of each component are adjusted according to the latest US stock market conditions.

When MMFI for S&P 500 rises, the S&P 500 index is likely to rise. When MMFI falls, the bullish cycle is likely to end soon. Once the index falls into the negative territory, a head is likely to form.

The Fundamental Index is updated on the last Friday of each month, reflecting the fundamentals over the past month. There may be subsequent changes due to data revisions for its constituent variables.

Charlie Munger Strategy: Buy Quality Stocks at 200-Week Moving Average

February 26, 2025 — 09:00 am EST

Written by Andrew Rocco for Zacks

Charlie Munger’s Lessons to Buffett

Warren Buffett is widely regarded as the most prolific and successful value investor of all time in most Wall Street circles. However, Buffett did not achieve success on his own. His best “investment” decision was probably his teaming up with Charles Munger.

Munger, who passed away in November 2023 at age 99, was Buffet’s best friend and was full of comedic charm, wisdom, experience, and investment knowledge until the day he died.

Did Buffett and Munger Use Technical Analysis?

One of my favorite quotes, especially regarding investing, is “Simplicity is the ultimate sophistication.” Having tried nearly every indicator under the sun and multiple investing strategies over my years of investing, I have learned that successful investing is more about removing clutter and focusing like a laser on what really matters.

While I would label my own personal investing framework as a trend-following growth investor, I would never discount Buffett and Munger’s success, and I discovered an old Munger quote that resonates with me:

“If all you ever did was buy high-quality stocks on the 200-week moving average, you would beat the S&P 500 by a large margin over time.”

The reason the quote resonated with me so strongly is because I have been utilizing this strategy for long-term investments for years, without seeing the quote. Though you and I will never be able to dig into a company balance sheet like Munger and Buffett, we can utilize some of these words of wisdom to make us better investors.

While Buffett and Munger are known chiefly for their deep fundamental analysis, the Munger quote suggests that the two investing legends use very long-term technical analysis to their advantage.

Buy Stocks Quality Stocks at a Discount

Before I get into some historical 200-week examples, investors must understand the nuances behind Munger’s 200-week strategy. Buffett credits Charlie Munger with advising him to stop buying companies only because they are deemed cheap. Instead, he advised Buffett to buy “wonderful” businesses at fair prices. There will always be stocks that have cheap valuations or stock prices. However, like in life, you often get what you pay for on Wall Street.

Rather than obsessing over share price or hyper-focusing on valuations, investors should buy:

·      Liquid, Industry Leaders: Investors should focus on the cream of the crop.

·      Healthy fundamentals:Buy cash-rich companies with strong fundamentals.

·      Institutional Quality:Institutional investors drive stock prices on Wall Street, so investors should focus on these stocks. In addition, having “smart money” betting on a stock can provide more conviction to hold through price volatility.

The Power of the 200-Week Moving Average

Below are four fantastic examples of the 200-week moving average at work:

Apple (AAPL)

For decades, AAPL has an example of what market leadership looks like. In that time, AAPL has become a tech juggernaut, a cash machine, and a big money favorite. How powerful is the 200-week MA in leading stocks? AAPL shares have held the moving average for the entire millennium thus far from a split-adjusted $2 to $244 today. In fact, AAPL held the 200-week even through the Wall Street panic of the 2008 Global Financial Crisis.

Image Source: Trading

While the 200-week MA is a fantastic indicator, investors must understand that it is a very rare signal. For instance, AAPL has only tested the moving average five times so far in the 2000s.

Nvidia (NVDA)

It’s hard to imagine a world where semiconductor stocks are not juggernauts – especially with today’s technology. However, investors wanted nothing to do with NVDA in the depths of the 2022 tech bear market, where shares lost two-thirds of their value. That said, the 200-day provided a life-changing signal in late 2022 when the stock retreated to the 200-week MA.

Image Source: TradingView

Microsoft (MSFT)

After a decades-long bear market, MSFT shares began rallying again in the 2010s. Like the NVDA example, savvy investors could have picked up MSFT shares after an orderly pullback to the 200-week MA in late 2022. MSFT shares have doubled since.

Image Source: TradingView

MicroStrategy (MSTR)

Things looked dark for crypto in 2022 after several bankruptcies, the FTX debacle, and fallingbitcoin prices However, if you believed in Bitcoin, MSTR, a Bitcoin proxy, gave an incredible signal when it retreated from its $132 high to the 200-week moving average in the $30s. Though it took patience, MSTR 200-week buyers were rewarded handsomely when shares reached a staggering $540 by 2024.

Image Source: TradingView

AMD Offers a Long-Term Asymmetric Opportunity

Advanced Micro Devices (AMD) is a global semiconductor company that designs and develops a wide range of high-performance computing, graphics, and visualization technologies.

200-Week Moving Average

Eventually, all great stocks pull back, and AMD is no different. While the companies’ fundamentals remain strong, sentiment could not be worse for the stock, and that’s why contrarian investors should give it a look here. While most investors are hyper-focused on shorter time frames, AMD is making a rare retreat to its 200-week MA.

Image Source: TradingView

DeepSeek Overblown, AI Spending Remains Strong

Though NVDA is the undisputed AI king, AMD also benefits from the spending in the AI revolution (which shows no signs of slowing and may actually be accelerating). Meanwhile, the DeepSeek news of a Chinese large language model (LLM) that was built with far fewer GPUs than ChatGPT has largely been debunked.

AMD is a Value Play

AMD’s recent pullback is making the stock attractive from a price-to-book perspective. The P/B is at the lowest level since 2023 when the stock went on to make a massive move higher.

Image Source: Zacks Investment Research

Bottom Line

Charlie Munger’s impact on Warren Buffett and the investing world cannot be overstated. While fundamental analysis remains at the core of their strategy, Munger’s insights into the 200-week moving average highlights the importance of patience, quality, and discipline in investing.

FactSet, John Butters  |  July 7, 2025

After recently closing at a record-high value, where do industry analysts believe the price of the S&P 500 will go from here?

Industry analysts in aggregate predict the S&P 500 will see a price increase of 7.5% over the next twelve months. This percentage is based on the difference between the bottom-up target price and the closing price for the index as of yesterday (July 2). The bottom-up target price is calculated by aggregating the median target price estimates (based on company-level estimates submitted by industry analysts) for all the companies in the index. On July 2, the bottom-up target price for the S&P 500 was 6,694.55, which was 7.5% above the closing price of 6,227.42.

At the sector level, the Health Care (+15.9%) and Energy (+13.5%) sectors are expected to see the largest price increases, as these two sectors had the largest upside differences between the bottom-up target price and the closing price on July 2. On the other hand, the Financials (+3.2%) and Industrials (+4.2%) sectors are expected to see the smallest price increases, as these two sectors had the smallest upside differences between the bottom-up target price and the closing price on July 2.

At the company level, the ten stocks in the S&P 500 with the largest upside and downside differences between their median target price and closing price (on July 2) can be found below.

It is interesting to note that after falling to a recent low of 6,526.43 on May 14, the bottom-up target price for the S&P 500 has increased by 2.6% (to 6,694.55 from 6,526.43) over the past several weeks. At the sector level, nine sectors have recorded an increase in their bottom-up target price since May 14, led by the Information Technology sector at 5.4% (to 5,347.32 from 5,074.39).

 

 

 

 

By John Butters  |  FactSet | July 3, 2025

Given concerns in the market about inflation and tariffs, did analysts lower EPS estimates more than normal for S&P 500 companies for the second quarter?

The answer is yes. During the quarter, analysts lowered EPS estimates by a larger margin compared to the three most recent averages. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all the companies in the index) decreased by 4.2% (to $62.83 from $65.55) from March 31 to June 30.

In a typical quarter, analysts usually reduce earnings estimates during the quarter. During the past 5 years (20 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 3.0%. During the past 10 years, (40 quarters), the average decline in the bottom-up EPS estimate during quarter has been 3.1%. During the past 15 years, (60 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 3.2%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the quarter has been 4.2%.

Thus, the decline in the bottom-up EPS estimate recorded during the second quarter was larger than the 5-year average, the 10-year average, and the 15-year average. However, it should be noted that the decrease was equal to the 20-year average.

At the sector level, ten of the eleven sectors witnessed a decrease in their bottom-up EPS estimate for Q2 2025 from March 31 to June 30, led by the Energy (-18.9%) sector.

Analysts have also continued to lower EPS estimates for CY 2025. From December 31 through June 30, the CY 2025 bottom-up EPS estimate declined by 3.6% (to $264.16 from $274.12).

Analysts also usually reduce earnings estimates for the year during the first six months of the year. During the past 5 years, the average decline in the annual bottom-up EPS estimate during the first six months of the year has been 3.3%. During the past 10 years, the average decline in the annual bottom-up EPS estimate during the first six months of the year has been 2.4%. During the past 15 years, the average decline in the annual bottom-up EPS estimate during the first six months of the year has been 1.5%. During the past 20 years, the average decline in the annual bottom-up EPS estimate during the first six months of the year has been 2.8%. During the past 25 years, the average decline in the annual bottom-up EPS estimate during the first six months of the year has been 2.8%.

Thus, the decline in the CY 2025 bottom-up EPS estimate recorded during the first six months of 2025 was larger than the 5-year average, the 10-year average, the 15-year average, 20-year average, and 25-year average for the first six months of the year.

At the sector level, ten sectors witnessed a decrease in their bottom-up EPS estimate for CY 2025 from December 31 to June 30, led by the Energy (-17.8%) and Materials (-12.0%) sectors. On the other hand, the Communication Services (+2.6%) sector is the only sector that recorded an increase in its bottom-up EPS estimate for CY 2025 during this period.

Family businesses in five charts

Carmignac, January 6, 2023

1) DO FAMILY BUSINESSES OUTPERFORM IN THE STOCK MARKET?

According to our Carmignac Family 500 database, if you invested €100 in a family business in January 2004, you would have €297 at the end of October 2022, compared with €251 if you had invested in a non-family business.

Reasons for this outperformance include: skin in the game1, a longer-term investment horizon and higher risk aversion. Family businesses are generally run with a long-term view based on earnings growth and profit-margin stability. As they invest their own money in their business, managers of family firms also tend to be more risk-averse. Founding families usually play a large role in business decisions, with a view to preserving family wealth and passing the company on to their children and grandchildren.

Family businesses are also characterised by:

Higher returns – The return on equity (ROE) for family businesses was 15.1% at the end of October 2022. But the equivalent figures for non-family companies was lower: 13% (ROE). This shows that family businesses tend to be managed more efficiently. Lower leverage – Family firms have lower net debt-to-EBITDA ratios: -0.07, versus 0.9 for non-family companies (equal to about one year of debt service costs). This indicates that family firms generate relatively more cash.

2) DOES STOCK MARKET PERFORMANCE CHANGE WITH LATER GENERATIONS?

When it comes to family wealth, there’s an old adage that says: "The first generation builds, the second generation expands, and the third generation squanders." Is that true for family businesses, too?

There’s evidence that stock-price appreciation tends to decline as younger generations take over the firm. Over the period from January 2004 to October 2022, the stocks of companies run by the first generation gained almost twice as much as those run by the fifth generation. Part of this reflects the heavy investment needed to adapt and keep growing a company as it ages.

3) WHAT’S THE MOST EFFECTIVE OWNERSHIP BREAKDOWN?

Looking again at the period from January 2004 to October 2022, the stocks of businesses that are more than 50%-owned by the founding family post much higher gains than companies with lower family stakes. This is largely due to better alignment between the interests of shareholders and management.

Such majority-owned businesses are also less subject to the demands of minority shareholders whose interests may not be consistent with those of management and/or the company's long-term goals.

4) WHERE ARE THE BEST-PERFORMING FAMILY BUSINESSES FOUND?

Family businesses generally outperform non-family businesses by a greater extent in developed countries than in emerging ones. This can be attributed to better corporate governance – an issue that’s increasingly important to investors – in the developed world. In addition, stock prices in emerging markets tend to be more volatile and show wider dispersion in returns, owing mainly to the higher risk premiums.

5) DO LARGE OR SMALL FAMILY BUSINESSES PERFORM BETTER?

According to our Carmignac Family 500 database, €100 invested in a mega-cap family business (with a market value of >$50 billion) in January 2004 would be worth €452 by the end of October 2022. The same amount invested in a large-cap family business (market value of $10 billion to $50 billion) would be worth some €270 today. For small- and mid-caps, the investment would have more than tripled: up by a factor of 3.4 for mid-caps (market value of $2 billion to $10 billion) and by a factor of 3.1 for small caps (market value of <$2 billion).

Very large companies are often more mature, meaning they generate less volatile returns, even in times of crisis. They also have deeper pockets and can achieve greater stability in profit margins and earnings. On the other hand, small companies are more vulnerable to market shocks and have less bargaining power for negotiating the interest rates on their loans, resulting in a relatively higher cost of capital.

Small companies tend to be more agile with higher growth potential, but large companies offer greater stability in business development. Large companies are also more likely to be sector leaders.

Over the past month, Trump’s tariffs have caused market turbulence, and gold, a traditional safe-haven asset, has experienced a new wave of growth, surpassing the $3,000 per ounce mark. However, U.S. Treasury bonds, historically another key safe-haven asset, have underperformed, leading to a decline in the U.S. Dollar Index. Why has the market dynamic shifted in this way?

Is the Role of U.S. Treasuries as a Safe-Haven Asset Changing?

Historically, during times of risk aversion, investors tended to sell risky assets like U.S. equities and shift funds into safe-haven assets such as U.S. Treasury bonds, driving up the value of the dollar. However, in recent years, the term "Bond Vigilante" has frequently surfaced, reflecting growing concerns over U.S. debt levels. Declining confidence in U.S. assets among foreign investors, combined with economic instability and geopolitical risks, has diminished the appeal of U.S. Treasuries as a safe-haven asset. In some cases, foreign investors have even offloaded Treasuries, leading to capital outflows that exert downward pressure on the dollar. Since the beginning of this year, concerns over de-globalization, fueled by Trump's tariff policies, have further weakened U.S. Treasuries and the dollar. In contrast, gold has remained the sole stable safe-haven asset, benefiting from shifting global capital allocations.

How Can We Observe This Phenomenon?

The growing divergence between confidence in U.S. Treasuries and gold can be observed through trends in foreign holdings of U.S. Treasuries and the increasing share of gold in global central bank reserves. In the 1990s, many countries reduced their gold reserves in favor of U.S. dollars and Treasuries, as the strength of the U.S. economy reinforced the dollar’s position as the world’s reserve currency. During this period, the U.S.’s strong fiscal position further encouraged central banks to hold Treasuries rather than gold.

However, the past decade has seen a shift. Since Trump initiated the trade war, the proportion of U.S. Treasuries held by foreign entities has steadily declined, while the share of gold in global central bank reserves has surged. The underlying reasons include China, Russia, and emerging markets challenging the dollar’s dominance by reducing their reliance on U.S. assets. At the same time, the growing U.S. fiscal deficit—especially since the Federal Reserve’s aggressive rate hikes in 2022—has raised concerns about the sustainability of U.S. debt (for more details, refer to our previous key chart analysis). As a result, gold’s status as both a safe-haven and reserve asset has strengthened, whereas U.S. Treasuries have lost their traditional safe-haven appeal.

Volume Profile indicates weakness of S&P 500

As you see in the picture reported below, "Volume Profile technical indicator applied at S&P 500 indicates a "b" profile after a long period of growth. Typically, this profile at this market stage, usually indicates a high probability of either a downturn or the beginning of a consolidation phase.

This profile at the end of a growth period indicates that the volumes at the top of the growth phase are very weak, while the volumes and the "point of control" (POC) are concentrated at the lower levels of prices indicating that the "stronger hands" of major investors have transferred the stocks to the "weaker hands" of minor investors attracted by the growing prices and convinced that the growth is keeping on.

Now what can implied interest rates tell us about the dollar? Since the euro accounts for close to 60% of the index weight, and with both the dollar and euro being policy-sensitive currencies, our research team found that the spread between the implied interest rate curve of the U.S. and the Eurozone can indicate whether the interest rate differential between the two region is widening (or narrowing), providing valuable insights into the trajectory of the dollar and euro: When the U.S.-Eurozone interest rate differential widens, the return on dollar assets is relatively higher, attracting capital inflows into the U.S. and pushing up demand for the dollar, which strengthens the DXY index. Conversely, if the interest rate differential narrows, capital may flow to the Eurozone, reducing demand for dollars and weighing on the index.

First, over the 12 months ending in November, US net foreign capital inflows increased sharply, totaling $1.2 trillion.

Second, during the same period, foreign private investors significantly increased their net purchases of US bonds and stocks, reaching $934.5 billion and $236 billion, respectively.

Third, Yardeni notes that private foreign investors acquired $509.4 billion in US Treasury notes and bonds, $108 billion in government agency bonds, and $317.1 billion in domestic corporate bonds over the past year, demonstrating widespread interest in both government and corporate debt.

Fourth, foreign investment in US equities has also hit record levels, with $76.5 billion flowing into stocks over the past three months. However, the firm highlights that their buying historically acted as a contrarian indicator.

After the market closed, Trump clarified that his administration is considering a 10% tariff on China, a significant reduction from the 60% he mentioned during his campaign. Meanwhile, Brent crude oil prices fell 3.3% since January 15, following Trump's executive orders aimed at boosting US oil and gas production.

The dollar weakened on Monday after the unexpected tariff delay but may recover if foreign investors continue purchasing US bonds and stocks.

"They [foreign] and domestic investors have less to fear right now about monetary policy and inflation in the US,” Yardeni said. “In addition, a US debt crisis doesn't seem to be imminent. Nor does a spike in oil prices caused by a geopolitical crisis."

These developments have eased concerns that weighed on the market in recent weeks, contributing to a pullback in equities since early December.

With improving sentiment, Yardeni Research suggests the path of least resistance is upward, especially if the Q4 2024 earnings season delivers the expected 12% year-over-year growth.

Key Facts

• Bank of America: BofA predicts the mark of the bullish beast, setting a 6,666 target for the S&P by the end of next year. That’s a 10% projected rise from Monday’s 6,050 price for the index. Among the tailwinds cited by the strategists led by Savita Subramanian include macroeconomic factors like lower interest rates and higher labor market productivity as well as a more favorable corporate backdrop with accelerating earnings and a potentially lower tax rate under President-elect Donald Trump. And “the average stock is more attractive than the overall index,” Subramanian said in a Monday call with reporters, explaining the “average stock is actually pretty inexpensive” with the last two years’ rally driving almost entirely by a handful of mega-cap technology stocks.
  
• BMO Capital Markets: The Canada-based firm has a 6,700 price target for the S&P, predicting an 11% gain. “Earnings growth is actually understated” and “the train has left the station” with the prospect of further gains as the Federal Reserve further lowers interest rates, BMO’s chief investment strategist Brian Belski told CNBC on Monday. “
  
• Deutsche Bank: The German-based bank has a Wall Street high end-of-2025 price target of 7,000 for the S&P. The Binky Chadha-led strategist group calls for about 16% further gains for American equities. “Various aspects” of the economic cycle should support a further advance, including increased capital expenditures outside of big technology, a boost from overseas economic recovery and a likely bump in mergers and acquisitions activity, according to Chadha.
  
• Evercore ISI: The tech-focused boutique bank set a 6,600 target for the S&P by the middle of 2025 following the election. The bull market is “still an infant,” wrote strategists led by Julian Emanuel. Yet the recent stalling of the post-election stock rally – the S&P is up less than 1% over the last four weeks– indicates the market is in a “digestion phase,” Emanuel told Bloomberg recently.
  
• Goldman Sachs: The investment bank predicted in a note to clients the S&P will end next year at 6,500, a 9% gain from Monday. It’s a view “predicated on continued U.S. economic expansion” and bolstered by the forecasted 11% earnings per share growth for the 500-company index. Notably, the Goldman group led by David Kostin predicts 2025 will be the slimmest relative outperformance of the “magnificent seven” stocks of the U.S.’ seven largest companies since 2017, reversing a trend of extended market-beating returns from the group led by AI leader Nvidia and iPhone maker Apple.
  
• Morgan Stanley: The Goldman rival has a matching 6,500 12-month price target for the S&P, the group led by Michael Wilson shared in a note. Morgan Stanley has a balmier 13% EPS growth forecast than Goldman, but shared the potential for “wider than normal” risks to its forecast due to “the potential uncertainty that the recent election outcome introduces.” Wilson set a bull case target of 7,400 for the S&P, implying a potential 26% advance, and a 4,600 bear case target, indicating a possible 28% correction.
  
• UBS: UBS Global Wealth Management has a 6,600 target for the S&P by the end of 2025, indicating a slightly more bullish 10% gain. The election “likely pulled forward the timing” of the returns associated with optimism from President-elect Donald Trump’s return to the White House in January, wrote Jason Draho, the group’s head of asset allocation, Americas, wrote to clients last week.
  
• Yardeni Research: The influential independent research firm led by has a balmy 7,000 target by the end of next year, implying a 19% gain. “Trump 2.0 represents a major regime change that’s bullish for the economy and stocks,” Yardeni wrote last week.

Crucial Quote

This is the “highest concentration market in 100 years,” Kostin said in a conference call with reporters. “But you look out longer term…the history of a high concentration market is it doesn't persist. It eventually fades. You get a broadening of the market.”

Contra

No surprise considering the often unpredictable nature of financial markets, price targets even from the most trusted names on Wall Street can prove imperfect. Last November, Goldman and Morgan Stanley projected the S&P to end 2024 at 4,700 and 4,500, respectively, both more than 25% below Monday’s price.

Big Number

10,000. That’s where the bullish Yardeni predicts the S&P could climb to 10,000 by the end of 2029, forecasting a strong 16% annualized return.

Key Background

Up 27% year-to-date, the S&P is on track to top 2023’s 23% gain, excluding dividends. This would be the first time the index rose at least 20% in consecutive years since 1995 to 1998 during the internet boom. The S&P’s 58% gain dating back to the end of 2022 has it on pace for its best two-year gain since the late 1990s. Driving much of the S&P’s recent success, which came in the face of a historically challenging high-rate environment, were big technology stocks, with the likes of Amazon, Meta, Nvidia and Tesla all gaining more than 150% since the end of 2022.

The data of MacroMicro US Stock Fundamental (SF) Index show a progressive weakness the stock market because we may see a divergence between the trend of the stock market quotes index which is still growing steadily and the one of the SF Index which is decreasing and is in the area of 5 value which is historically the border to indicate a possible reversal of the stock market growth.

Realistically, we have to wait a little bit more but not much to verify whether this alarm is confirmed or we may see this divergence just as short term relax in the major expansion trend.

S&P 500 Q3 2023 Buybacks Up 6.1% and Impact to Earnings Per Share Continues to Decline; Buyback Tax Reduced Operating Earnings by 0.39%

• S&P 500 Q3 2023 buybacks were $185.6 billion, up 6.1% from Q2 2023’s $174.9 billion and down 12.0% from Q3 2022’s $210.8 billion

• The 12-month September 2023 expenditure of $787.3 billion was down 19.8% from the $981.6 billion expenditure of September 2022

• Financials pulled back again to $29.3 billion from $32.7 billion in Q2 2023 and $46.9 billion in Q1 2023; Information Technology ticked up to $48.6 billion from Q2’s $47.1 billion

• Energy pulled back to $16.2 billion, representing 8.7% of all buybacks; whereas the sector represented 4.4% of the market value and had four issues in the top 20 for the quarter

• The new net buyback 1% tax reduced Q3 2023 operating earnings by 0.39% (0.34% in Q2 2023) and As Reported GAAP by 0.42% (0.38%)

Key Takeaways:

• Q3 2023 share repurchases were $185.6 billion, up 6.1% from Q2 2023’s $174.9 billion expenditure and down 12.0% from Q3 2022’s $210.8 billion.

• 281 companies reported buybacks of at least $5 million for the quarter, down from 304 in Q2 2023 and down from 319 in Q3 2022; 362 companies did some buybacks for the quarter, down from 367 in Q2 2023 and down from 384 in Q3 2022; 428 companies did some buybacks for the 12-months ending September 2023, down from 441 in the prior 12-month 2022 period.

• Buybacks remained top heavy with the top 20 S&P 500 companies accounting for 50.9% of Q3 2023 buybacks, down from Q2 2023’s 52.0% but still above the historical average of 47.3%, and above the pre-COVID historical average of 44.5%.

• For the 12-months ending September 2023, buybacks were $787.3 billion, down from $981.6 billion for the prior 12-month September 2022 period.

• 13.5% of companies reduced share counts used for earnings per share (EPS) by at least 4% year-over-year, down from Q2 2023’s 16.3% and down from Q3 2022's 21.2%; for Q3 2023, 172 issues increased their shares used for EPS over Q2 2023 and 246 reduced them.

• S&P 500 Q3 2023 dividends increased 0.7% to $144.2 billion from the prior Q2 2023’s $143.2 billion and were 2.7% greater than the $140.3 billion in Q3 2022. For the 12-months ending in September 2023, dividends set a record $580.2 billion payment, up 5.0% on an aggregate basis from the 12-month September 2022’s $552.4 billion.

• Total shareholders return of buybacks and dividends increased to $329.8 billion in Q3 2023, up 3.7% from Q2 2023’s $318.1 billion and down 6.1% from Q3 2022’s $351.2 billion. Total shareholder returns for the 12-months ending September 2023 decreased to $1.367 trillion from the 12-month September 2022 $1.534 trillion.

• The new 1% tax on net buybacks, which started in 2023, reduced the Q3 2023 S&P 500 operating earnings by 0.39% and As Reported GAAP earnings by 0.42%; the proforma for full year 2022 was a 0.51% reduction for operating and a 0.58% reduction for as reported.

What Is a Volume Profile (VP) or Volume at Price (VaP) or Price by Volume Chart (PbV)?

A price by volume (PBV) chart is a horizontal histogram plotted on a security's chart, showing the volume of shares traded at a specific price level. Often times, price by volume histograms are found on the Y-axis and are used by technical traders to predict areas of support and resistance.

KEY TAKEAWAYS

Measures of economic surprises appear to be a useful way to gauge market sentiment. When the economy is booming data releases will typically be better than analysts expected, boosting the CESI. During an economic downturn, economic statistics will fall below the consensus estimate, leading to negative surprises. From June 2020 to July 2021, when the CESI for America was positive thanks to upbeat employment, inflation and housing figures, the S&P 500 index of big American firms rose by 38%. Since then the CESI has bounced above and below zero, and shares have fallen by roughly 9%.

In a paper published in 2016 Chiara Scotti, an economist at the Federal Reserve, constructed her own surprise index based on five indicators: GDP, industrial production, employment, retail sales and manufacturing output. America’s index also measured personal income. Ms Scotti found that positive economic surprises in America were associated with appreciation of the dollar relative to the euro, pound sterling and yen. (In fact, Citi’s index was designed by the bank’s foreign-exchange unit for trading currencies, not stocks.)

But the surprise index can be hard to interpret. The CESI includes both backward- and forward-looking macroeconomic indicators, and is weighted in favour of newer releases and those that tend to have the biggest impact on markets. Because the index reflects economic performance relative to expectations, it can be negative during expansions if forecasters are too optimistic, and positive during contractions if they are too gloomy. But as Citi analysts wrote in a research note, “coincident rather than causal relationships are relied on even if they have no consistency whatsoever.”

Warren Buffett Has Underperformed the Stock Market for the Last 20 Years

Rishit Jain, CFA

Finance Professional

April 27, 2023

Alright, before I say anything else, let me say this first. I'm a Warren Buffett fan. And not just because he's the most successful investor of all time. But also because of his integrity, his wisdom, and his wit—all of which he delivers in his characteristically affable style. I mean, it's hard not to be inspired by someone who practices their craft with such devotion and grace. So, anything I say here is not so much a criticism of him as it is a comment on the nature of investing itself.

Now that I've paid my respects, I feel comfortable saying what needs to be said. That under the leadership of Warren Buffett, Berkshire Hathaway has underperformed the stock market for the last 20 years.

Seriously?!

Yeah, seriously.

Here's the table from Buffett's 2022 letter to Berkshire shareholders that shows the annual returns of the Berkshire stock and that of the S&P 500, going back to 1965.

Let me draw your attention to the last two rows of the table, which show the compounded annual gain since 1965 and also the overall gain since then.

Beginning in 1965, over a period of 58 years, the S&P 500, dividends included, delivered a compounded annual gain of 9.9%, while the Berkshire stock delivered 19.8%.

That doesn't seem like such a big deal until you see that the overall gain for the S&P 500 during the same period was 24,708%, while that for the Berkshire stock was 3,787,464%.

Damn. That almost seems like a misprint.

I know what you're thinking. "I gotta get in on that sweet sweet Berkshire action asap." Yeah?

I get it. I had the same thought.

But, not so fast.

We're not starting in 1965 and investing for the next 58 years. We're starting in 2023 and investing for, perhaps, the next 10, 20, or 30 years.

10 years is a reasonably long investment period, so let's look at how Berkshire has performed against the S&P 500 over various 10 year periods.

The 10Y-BRK column shows 10 year compounded annual returns for Berkshire, while the 10Y-SPX shows them for the S&P 500. The important column is Difference, which shows the outperformance of Berkshire over the S&P 500.

Honestly, I was very surprised by these results. I had expected the Difference column to be largely green with some scattered reds, i.e. the Berkshire stock outperforming the S&P 500 over most 10-year periods with some occasional underperforming periods.

But, as you can see, the greens are all clustered in the beginning, with things gradually moving to the yellows, and, from about 2003, it's all reds.

I did the math and starting from 1965 to 2002, a period of 38 years, the compounded annual return of the S&P 500 was 10.02% while that of Berkshire was 25.66%.

But—and here's the kicker—from 2003 to 2022, a period of 20 years, the S&P 500 delivered a 9.80% compounded annual return while Berkshire came in lower at 9.75%.

Now imagine you were someone in 2003, looking for the best possible investment. You'd look at Berkshire's crazy outperformance over the S&P 500 over a 38 year period and would, of course, invest in the stock. I mean, who wouldn't. But over the next 20 years, your investment would've done slightly worse than if you had just bought a low-cost S&P 500 index fund. Thankfully, not by a massive margin, but the outcome would've definitely not been the one you were expecting when you had bought the stock.

It's not for nothing that every investment proposal in the world ends with the disclaimer that past performance is no guarantee of future results.

If someone like Warren Buffett could not beat the S&P 500 for 20 long years, what hope is there for mere mortals like us.

And yet we continue to chase outperformance—moving into investments with recent high returns, moving out as those high performers inevitably disappoint, paying all kinds of transaction costs, management fees, and taxes along the way, not to mention the psychological costs of constantly wondering if we've made the right call—only to see our portfolios not even deliver average returns.

Because here's the thing. A majority of professional investment managers—to say nothing of amateur investors—underperform the market even over as short a period as 1 year. And the longer the investment period gets, the worse the underperformance gets.

S&P, the company, publishes an annual report of the performance of actively managed funds versus the S&P indices. And every single year they find active managers consistently underperforming the indices.

Here's the report for 2022 with performance data for the US market and a bunch of others.

93.40% of all actively managed large-cap US funds underperformed the S&P 500 over a 15 year period.

Let that sink in.

Given that Berkshire underperformed the S&P 500 only slightly over a 20 year period is actually a credit to the quality of investment management by Warren Buffett.

Would Berkshire continue to underperform the S&P 500 over the next 20 years or would it now start outperforming? I don't know. And I doubt if Buffett himself would answer any differently.

So, what's the alternative to this outperformance-chasing, anxiety-inducing, and eventually disappointing investment strategy that most of us follow?

The answer is simple. Index funds.

A low-cost index fund won't outperform the market (by definition), and won't make for exciting dinner table conversation (unlike the latest investment fad), but it will almost certainly deliver better long-term returns than any active investment strategy that you might follow, whether directly yourself or through a fund.

Sure, you might get lucky and end up picking an investment that delivers long-term above market returns. But are you, literally, willing to bet your life savings on it?

Moreover, putting your money in an index fund comes with an added advantage. It saves you the constant worry that your investments might underperform the market and also the hassle of moving to other investments if they indeed do.

The fact that the greatest investor of all time has not been able to outperform a simple broad market index over a period of two decades should at least give us a pause and make us question our own ability of doing so over the next two.

Because recognising our limitations and having a measure of humility in the face of extreme complexities and uncertainties of financial markets might just be the thing we need to finally set ourselves on the path to becoming better, more effective investors.

Semiconductor investors didn't get the recession memo. They have anticipated the industry’s improvement for many months. The S&P 500 Semiconductors industry stock price index has jumped 55.8% from its late 2022 low, as of Tuesday’s close (chart). The index remains 20.9% off of its November 29, 2021 peak.

As is often the case in this industry, investors jumped into semiconductor shares before seeing the industry’s results actually turn around. Revenue for the S&P 500 Semiconductors industry this year is expected to decline 10.1%, before increasing 14.3% in 2024. Likewise, the industry’s earnings are forecast to drop 21.2% this year before rebounding by 31.4% next year. The industry's forward earnings is highly correlated with worldwide semiconductor sales (chart). Both have been falling since early last year.

Undervalued Defensive Stocks to Buy Now

High-quality names such as Veeva, Medtronic, Pfizer, and Kellogg are trading at discounted prices.

Margaret Guidici - Mar 2, 2023

The past year was a rough one for the stock market, but defensive stocks still made gains as a group.

The good news for long-term investors looking to put money to work in defensive stocks is that there are still plenty of cheap defensive stocks worth considering. Morningstar equity analysts see room for growth in a number of high-quality, defensive names such as Veeva Systems VEEV and Medtronic MDT.

To look for undervalued defensive stocks, we turned to the Morningstar US Defensive Super Sector Index, which measures the performance of stocks from traditionally defensive sectors such as utilities, consumer defensive, and healthcare.

The Morningstar US Defensive Super Sector Index gained 1.6% for the past 12 months through Feb. 27, 2023, while the broader market fell 6.3%, as measured by the Morningstar US Market Index.

Of the 323 defensive stocks in the index, 150 are covered by Morningstar analysts. Of those 150, 45 were considered undervalued as of Feb. 27, 2023.

Line graph showing trailing 12-month performance for the Morningstar US Defensive Super Sector Index and the Morningstar US Market Index for February 2022-February 2023.

What is a Defensive Stock?

Defensive stocks are normally resistant to economic cycles because their products are necessary in good times or bad. Consumer defensive companies are engaged in the manufacturing of food and beverages, household and personal products, packaging, and tobacco. Some consumer defensive companies provide education and training services. UnitedHealth Group UNH, Merck MRK, and PepsiCo PEP are among the largest companies in the Defensive Super Sector Index.

Defensive Stocks to Buy Now

We looked for the most undervalued stocks in the Morningstar US Defensive Super Sector Index that currently carry a Morningstar Rating of 4 or 5 stars. Then we looked for stocks that have earned a Morningstar Economic Moat rating of wide, in order to screen for companies with durable competitive advantages. Over the long-term, investing in undervalued stocks with moats can improve the odds of outperforming.

These were the nine most undervalued stocks in the Morningstar Defensive Super Sector Index as of Feb. 27

S&P 500 Price to Book Value was 4.03 as of 2023-01-24, according to S&P Dow Jones Indices. Historically, S&P 500 Price to Book Value reached a record high of 5.06 and a record low of 1.46, the median value is 2.83. Typical value range is from 2.61 to 3.89. The Year-Over-Year growth is -7.84%. GuruFocus provides the current actual value, an historical data chart and related indicators for S&P 500 Price to Book Value - last updated from the United States Federal Reserve on 2023-01-24.

S&P 500 NOW PROJECTED TO REPORT YEAR-OVER-YEAR EARNINGS DECLINES IN Q1 2023 AND Q2 2023

EARNINGS

By John Butters  |  January 18, 2023

The estimated earnings decline for the S&P 500 for the fourth quarter is -3.9%, which would mark the first year-over-year earnings decline reported by the index since Q3 2020 (-5.7%). Looking ahead to the first quarter and beyond, what are analyst expectations for year-over-year earnings? Do analysts believe earnings declines will continue in 2023?

The answer is yes. Over the past few weeks, earnings expectations for the first quarter and the second quarter of 2023 switched from year-over-year growth to year-over-year declines. However, expectations for earnings for both Q1 2023 and Q2 2023 have been falling over the past few months. On June 30, the estimated earnings growth rate for Q1 2023 was 9.6%, and the estimated earnings growth rate for Q2 2023 was 10.3%. By September 30, the estimated earnings growth rate for Q1 2023 was 6.3%, and the estimated earnings growth rate for Q2 2023 was 5.1%. Today, the estimated earnings decline for Q1 2023 is -0.6%, and the estimated earnings decline for Q2 2023 is -0.7%.

At the sector level, 10 of the 11 sectors have witnessed a decline in estimated earnings for the first half of 2023 since September 30, led by the Consumer Discretionary, Communication Services, and Materials sectors. Overall, six sectors are now projected to report a year-over-year decrease in earnings for the first quarter, and three sectors are predicted to report a year-over-year decrease in earnings for the second quarter. The Materials and Health Care sectors are the only two sectors predicted to report a year-over-year decrease in earnings for both quarters.

As of today, the index is expected to report three straight quarters (Q4 2022 through Q2 2023) of year-over-year earnings declines. If this happens, it will mark the fourth time it has occurred since 2015. The last time the index reported at least three straight quarters of year-over-year earnings declines was Q1 2020 through Q3 2020.

However, it should be noted that analysts believe earnings growth will return in Q3 2023 (5.2%) and Q4 2023 (10.7%). As a result, they expect the index to report earnings growth of 4.6% for all of 2023. Obviously, all of this earnings growth is projected for the 2nd half of 2023.

Industry Analysts Trimming Earnings

By Dr Ed Yardeni – 19 Jan 2023

Industry analysts continue to trim their estimates for S&P 500 earnings for each of this year's four quarters (chart).  They may continue to do so if company managements provide cautious earnings guidance during the current earnings reporting season.

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Nevertheless, as of the January 12 week, the analysts still expected that earnings will increase 4.0% this year compared to last year from $219.46 per share to $228.27. Next year, they currently expect a 10.7% increase to $252.61 (chart).

They must have gotten the soft-landing memo rather than the hard-landing one. We are still at $225 per share for this year and $250 for next year. Hard landers are forecasting $200 or even less for this year.

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The percent of companies with positive three-month percent changes in forward earnings was down to 51.9% during the January 13 week (chart). That's somewhat disturbing, but not alarming, in our opinion. The improving outlook for the global economy should minimize the downside in this series over the rest of the year, and should provide some upside.

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CANADA EARNINGS SEASON PREVIEW: Q4 2022

EARNINGS

By John Butters, January 25, 2023

Analysts lowered their earnings estimates more than average for the fourth quarter for companies in the S&P/TSX Composite. On a per-share basis, estimated earnings for the fourth quarter decreased by 7.1% from September 30 to December 31. For a quarter, this decline was larger than the 5-year average (-1.1%), the 10-year average (-3.0%), the 15-year average (-4.5%), and the 20-year average (-3.6%).

The fourth quarter also marked the largest decline in the quarterly EPS estimate since Q2 2020 (-36.7%). At the sector level, eight of the eleven sectors recorded a decline in earnings during the quarter, led by the Materials (-24.3%), Health Care (-15.4%), and Energy (-13.8%).

Because of the net downward revisions to earnings estimates, the estimated (year-over-year) earnings growth rate for Q4 2022 is lower now relative to the start of the fourth quarter. As of today, the S&P/TSX Composite is expected to report (year-over-year) earnings growth of 1.3%, compared to the estimated (year-over-year) earnings growth rate of 3.6% on December 31 and the estimated (year-over-year) earnings growth rate of 13.3% on September 30.

If 1.3% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q3 2020. Seven of the 11 sectors are projected to report year-over-year earnings growth, led by the Utilities, Energy, and Industrials sectors. On the other hand, four sectors are predicted to report a year-over-year decline in earnings, led by the Materials, Health Care, and Information Technology sectors.

Looking ahead, analysts expect a decline in earnings of -6.6% for Q1 2023 and a decline in earnings of -4.4% for Q2 2023. For all of CY 2023, analysts are predicting a decline in earnings of -0.6%.

The forward 12-month P/E ratio is 13.4, which is below the 5-year average (14.9) and below the 10-year average (15.2).

The peak weeks of the Q4 2022 earnings season for the S&P/TSX Composite start next week. Over the next six weeks, nearly 200 companies in the index are expected to report results for the fourth quarter.

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S&P 500 REPORTING A LOWER NET PROFIT MARGIN FOR 6TH STRAIGHT QUARTER EARNINGS

By John Butters  |  January 23, 2023

FACTSET

The market continues to be concerned about higher inflation. Consumer prices increased by 6.5% in December. Although the number has been falling in recent months, it still marked the 15th consecutive month in which the percentage exceeded 6% (year-over-year). Given these concerns, what is the S&P 500 reporting for a net profit margin for the fourth quarter?

The (blended) net profit margin for the S&P 500 for Q4 2022 is 11.4%, which is below the previous quarter’s net profit margin of 11.9% and below the year-ago net profit margin of 12.4%. However, it is equal to the 5-year average net profit margin (11.4%).

If 11.4% is the actual net profit margin for the quarter, it will mark the sixth straight quarter in which the net profit margin for the index has declined quarter-over-quarter. It will also mark the lowest net profit margin reported by the index since Q4 2020 (10.9%).

At the sector level, four sectors are reporting a year-over-year increase in their net profit margins in Q4 2022 compared to Q4 2021, led by the Energy sector (to 13.4% vs. 9.3%). On the other hand, seven sectors are reporting a year-over-year decrease in their net profit margins in Q4 2022 compared to Q4 2021, led by the Materials sector (10.1% vs. 13.2%) and Financials sector (15.5% vs. 18.5%).

Four sectors are reporting net profit margins in Q4 2022 that are above their 5-year averages, led by the Energy sector (13.4% vs. 7.4%). On the other hand, seven sectors are reporting net profit margins in Q4 2022 that are below their 5-year averages, led by the Communication Services sector (9.6% vs. 11.7%).

Only two sectors are reporting a quarter-over-quarter increase in their net profit margins in Q4 2022 compared to Q3 2022, led by the Financials sector (to 15.5% vs. 14.2%). On the other hand, seven sectors are reporting a quarter-over-quarter decrease in their net profit margins in Q4 2022 compared to Q3 2022, led by the Real Estate sector (35.1% vs. 37.7%). Two sectors (Communication Services and Information Technology) are reporting no change in net profit margins quarter-over-quarter.

What is driving the continuing decline in net profit margins for the S&P 500? Higher costs are likely having a negative impact on net profit margins. Producer prices increased by 6.2% in December. Again, although the number has been falling over the past several months, the percentage has exceeded 6.0% (year-over-year) for 21 straight months. During the previous earnings season, 402 S&P 500 companies cited “inflation” on earnings calls for the third quarter, which was the third-highest number in more than 10 years. Companies may be having more difficulty raising prices to offset higher costs, as the S&P 500 is reporting its lowest revenue growth for Q4 2022 (3.7%) since Q4 2020 (3.2%).

In addition, companies are facing a difficult year-over-year comparison to unusually high net profit margins in 2021. In Q4 2021, the S&P 500 recorded the fourth-highest net profit margin (12.4%) reported by the index since FactSet began tracking this metric in 2008.

It is interesting to note that analysts believe net profit margins for the S&P 500 will be higher going forward. As of today, the estimated net profit margins for Q1 2023, Q2 2023, Q3 2023, and Q4 2023 are 11.9%, 12.1%, 12.3%, and 12.2%, respectively.

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S&P 500 EARNINGS SEASON UPDATE: JANUARY 20, 2023

EARNINGS

By John Butters  |  January 20, 2023

The fourth quarter earnings season for the S&P 500 is not off to a strong start. To date, the number and magnitude of positive earnings surprises reported by S&P 500 companies are below their 5-year and 10-year averages. Overall, the index is reporting a year-over-year decline in earnings for the first time since Q3 2020. The earnings decline for the fourth quarter is larger today compared to the end of last week and compared to the end of the quarter due to a combination of negative earnings surprises reported by companies and downward revisions to earnings estimates by analysts during the past few weeks.

Overall, 11% of the companies in the S&P 500 have reported actual results for Q4 2022 to date. Of these companies, 67% have reported actual EPS above estimates, which is below the 5-year average of 77% and below the 10-year average of 73%. In aggregate, companies are reporting earnings that are 3.3% above estimates, which is below the 5-year average of 8.6% and below the 10-year average of 6.4%.

The index is reporting lower earnings for the fourth quarter today relative to the end of last week and relative to the end of the quarter. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the fourth quarter is -4.6% today, compared to an earnings decline of -4.0% last week and an earnings decline of -3.2% at the end of the fourth quarter (December 31).

Negative earnings surprises and downward revisions to earnings estimates for companies in the Financials sector have been the largest contributors to the increase in the overall earnings decline for the index over the past week and since December 31.

If -4.6% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decrease in earnings since Q3 2020 (-5.7%). Four of the 11 sectors are reporting (or are expected to report) year-over-year earnings growth, led by the Energy and Industrials sectors. On the other hand, seven sectors are reporting a year-over-year decline in earnings, led by the Materials, Consumer Discretionary, and Communication Services sectors.

In terms of revenues, 64% of S&P 500 companies have reported actual revenues above estimates, which is below the 5-year average of 69%, but above the 10-year average of 63%. In aggregate, companies are reporting revenues that are 0.3% above the estimates, which is below the 5-year average of 1.9% and below the 10-year average of 1.3%.

The index is also reporting lower revenues for the fourth quarter today relative to the end of last week and relative to the end of the quarter. The blended revenue growth rate for the fourth quarter is 3.7% today, compared to a revenue growth rate of 3.8% last week and a revenue growth rate of 3.9% at the end of the fourth quarter (December 31).

Downward revisions to revenue estimates for companies in the Energy and Utilities sectors have been the largest contributors to the decrease in the overall revenue growth rate for the index over the past week and since December 31.

If 3.7% is the actual growth rate for the quarter, it will mark the lowest revenue growth rate reported by the index since Q4 2020 (3.2%). Eight sectors are reporting year-over-year growth in revenues, led by the Energy and Industrials sectors. Three sectors are reporting (or are expected to report) year-over-year declines in revenues, led by the Utilities sector.

Looking ahead, analysts expect earnings declines for the first half of 2023, but earnings growth for the second half of 2023. For Q1 2023 and Q2 2023, analysts are projecting earnings declines of -1.1% and -1.2%, respectively. For Q3 2023 and Q4 2023, analysts are projecting earnings growth of 4.6% and 10.5%, respectively. For all of CY 2023, analysts predict earnings growth of 4.2%.

The forward 12-month P/E ratio is 17.0, which is below the 5-year average (18.5) and below the 10-year average (17.2). However, it is above the forward P/E ratio of 16.7 recorded at the end of the fourth quarter (December 31), as the price of the index has increased while the forward 12-month EPS estimate has decreased since December 31.

During the upcoming week, 93 S&P 500 companies (including 12 Dow 30 components) are scheduled to report results for the fourth quarter.

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Global ex US PE/VC Benchmark Commentary: First Half 2022

Caryn Slotsky, Jan 2023

According to Cambridge Associates (CA) indexes, private equity and venture capital (PE/VC) in the developed markets underperformed those in emerging markets in first half 2022. The Cambridge Associates LLC Developed Markets ex US PE/VC Index returned -11.1% in the period, in USD terms, and -3.3% in euros. Because returns are measured in US dollars, the currency’s value relative to the euro impacts performance of the developed markets index. Amid fears of a global recession, the US dollar strengthened against most currencies, including the euro, making returns relatively weaker. The Cambridge Associates LLC Emerging Markets PE/VC Index earned -5.9% for the period, breaking a long-term trend of generating weaker returns than the developed markets index (Figure 1). The developed markets and emerging markets PE/VC indexes have handily outperformed their public market counterparts across time (based on modified public market equivalent [mPME] returns), with the widest margins occurring within the last five years.

First Half 2022 Highlights

Developed ex US Markets Private Equity and Venture Capital Performance Insights

Vintage Years

The overall decline in the Developed ex US PE/VC Index during the first six months of 2022 was observable in vintage year performance. All eight meaningfully sized vintages (those that represented at least 5% of the index’s value) had negative returns, ranging from -14.4% for 2019 funds to -2.6% for 2021 (Figure 2). Three of the key vintages (2014, 2018–19) experienced double-digit negative returns; they also represented three of the largest by weight, accounting for more than 40% of the index. In total, all eight vintages represented roughly 85% of the index and earned a pooled return of -9.7%, slightly better than the full benchmark’s return of -11.1%. While still in the red, the 2021 vintage performed the best among the largest years, buoyed by small write-downs in IT companies and a positive return for financials. Additionally, the value of new investments is often held around cost, which could have helped 2021 funds perform better, relative to older vintage years, whose investments are more mature and therefore more impacted in a down market. Vintages also typically require years of activity before qualifying as meaningfully sized but the frothy fundraising environment, fast investment pace, and strong performance during the pandemic recovery enabled the 2021 vintage to reach a weighting of 7.2% of the index after less than two years of investing. The worst-performing vintage, 2019, experienced significant write-downs in its two largest sectors, IT and consumer discretionary (in rank order).

After limited partner (LP) cash flows reached record numbers in the second half of 2021, both contributions and distributions fell significantly in the first six months of 2022. A steep decrease in valuations, high inflation globally, and tighter monetary policy imposed by central banks led PE/VC managers to pause. Contributions and distributions dropped 60% and 37%, respectively, from levels reached during the second half of 2021. The slowdown in investment activity was evident as managers only called $18.8 billion, the lowest amount since the first half of 2019. Funds in the developed markets PE/VC index returned $33.1 billion, in line with the average of all rolling six-month horizons within the last five years. In the last ten years, distributions outpaced contributions in all but seven six-month periods, although every exception occurred since 2019.

Three vintages (2019–21) accounted for almost 88% of the capital called, or $16.5 billion, during the first half of the year. Despite being the largest of the recent vintage years by total capitalization, funds in 2021 called less than $4 billion, far below 2019 and 2020 funds, which both called more than $6 billion. This could correlate to the contraction in the broader investable universe and manager’s inability to deploy newly funded capital. Distributions were widespread across vintages, with nine years (2011–19) returning more than $1.2 billion to their LPs. Even in their eleventh year, funds in 2012 distributed $6.2 billion, the largest of any vintage year.

Sectors

Figure 3 shows the Global Industry Classification Standard (GICS®) sector breakdown of the Developed Markets ex US Private Equity and Venture Capital Index and a public market counterpart, the MSCI EAFE Index. The chart illustrates differences in sector exposures, which helps explain relative performance. Notably, the PE/VC index is overweight in consumer discretionary, healthcare, industrials, and IT, and underweight in financials, consumer staples, and smaller sectors in the “other” categories (energy, utilities, and real estate).

Returns were negative for all seven meaningfully sized sectors in the first two quarters when measured in US dollars. However, given the US dollar’s strength as a reserve currency during the volatile environment, returns were notably better when measured in euros (Figure 4). Performance varied across the value/growth spectrum, ranging from -19.1% for communication services and -18.4% for IT to -6.5% for industrials. There were write-downs in all but three vintage years for industrials, but the majority experienced modest declines when compared to other sectors. Performance for communication services, the worst-performing sector, was driven by an old vintage and a young vintage. Funds in 2006 and 2020 represented the largest amount of capital and each declined by around $1.2 billion during the first half of the year. Much of the value in communication services was held in media and entertainment companies, including streaming services, which performed well during the pandemic and subsequently fell during the recovery in 2022.

The four largest sectors—IT, industrials, consumer discretionary, and healthcare (in rank order)—represented 73% of the index’s value and combined returned -12.9% compared to -14.4% for the other three meaningfully weighted sectors. The same four sectors accounted for 77% of the capital invested during first half 2022, about 10% higher than their long-term average of 67%. Allocations to IT companies were higher than long-term trends during the period, which accounts for much of the difference.

Countries

Performance varied across the seven meaningfully sized countries, with all but one (the Netherlands) suffering negative returns in the first six months when measured in USD terms (Figure 5). Like sectors, the foreign exchange environment in 2022 made returns in euros materially better. The US-based companies, which accounted for the largest value in the index (18%), had the worst return at -19.9%; four other countries experienced double-digit negative returns. Combined, the seven largest countries accounted for 71% of the PE/VC index. Performance for the Netherlands, which earned 2.2% and 11.2% in USD and euro terms, respectively, was driven by the 2017 vintage. The recent vintages (2017–21) all had positive returns, exceeding declines in older vintages. The two largest sectors within the Netherlands were consumer staples and industrials—two of the more resilient industries—which could explain the country’s outperformance during a volatile, risk-off investment environment. At the bottom of the list, US company valuations decreased in all meaningfully sized vintage years, most notably 2014 and 2018.

Companies in the Netherlands garnered over 4% of the capital invested during the first six months of the year, right in line with its historical trend. US businesses attracted slightly less than 16% of the invested capital, which is about 3% higher than its long-term allocation.

Emerging Markets Private Equity and Venture Capital Performance Insights

Vintage Years

Like the developed markets, all eight meaningfully sized vintage years in the emerging markets index (those that represented at least 5% by capital weight) suffered losses in first half 2022 (Figure 6). Performance ranged from -1.0% for funds with a first cash flow in 2019 to -8.4% for 2014 funds. Combined, the eight vintage years (2011, 2013–19) accounted for 79% of the index and earned a pooled return of -4.9% in the period, slightly better than the full index return of -5.9%.

The best-performing vintage year, 2019, was driven by mixed results from its largest sector exposures. Mark-ups in healthcare, industrials, and IT slightly outpaced write-downs in consumer discretionary and communication services. However, on a net basis after fees, the overall return for the vintage was negative. On the bottom of the list, 2014 funds were pulled lower by an overweight to healthcare and IT, two sectors that performed poorly in the first six months of the year. At the close of the second quarter, the largest vintage year by far was 2018, representing 19.5% of the index. It posted the second-best return (-2.7%) among the eight major vintages, buoyed by negative, but better, returns than other years in IT and healthcare.

Contributions and distributions declined by roughly the same degree in the first half of the year from the prior period. Emerging markets PE/VC funds called $12.1 billion from and distributed $15.8 billion to LPs, representing a 36% and 34% drop, respectively. Both cash flows hit their lowest levels since 2020, which was marked by the onset of the COVID-19 pandemic and limited investment activity. However, contributions were right in line with their ten-year average for all two-quarter periods, and distributions were considerably higher than theirs. Since 1986, distributions only outpaced contributions in approximately 20% of any rolling six months, but they outpaced contributions in all but one of the 11 recent periods.

About 88% of the capital called in the first six months was from managers that started investing funds in 2018 to 2021. All four vintages drew down at least $1.9 billion, with 2018 funds calling $3.5 billion, by far the most of any group. Distributions were much more widespread, as six different vintages returned over $1 billion to investors. Notably, the 12-year-old funds from 2011 returned the most capital, $3.1 billion.

Sectors

Figure 7 shows the GICS® sector breakdown of the Emerging Markets PE/VC Index and a public market counterpart, the MSCI Emerging Markets Index. The chart highlights the significant overweights in the PE/VC index, such as in healthcare, for which exposure is more than four times higher than in the public index. Previously, the PE/VC index also had considerably more capital allocated to consumer discretionary and IT than the public benchmark, but exposure to those sectors has recently increased in the MSCI Emerging Markets Index. The private underweights are most significant in financials, followed by materials and energy (which is now included in the “other” category).

Returns in first half 2022 were negative for all seven meaningfully weighted sectors (Figure 8). The more growth-oriented industries did worse; communication services experienced an 11.1% decline, IT fell by 8.6%, and healthcare by 7.5%. On the contrary, none of the cyclical sectors (industrials, consumer staples, financials, and consumer discretionary) lost more than 4.6%.

Consumer discretionary companies performed the best of the major sectors but were still in the red. Valuations for investments made by funds in all but four vintage years (2007, 2011, 2014, and 2020) were written down or kept flat. However, almost a quarter of the value for consumer discretionary businesses resided in 2015 funds and those had only a slightly negative return. Conversely, all vintage years with sizable communication services weightings, the worst-performing sector, wrote down the values of those companies. Communication services companies in the 2011 funds fell the most, suffering over a -26% return. On a gross, dollar-weighted basis, the three largest sectors by market value—IT, consumer discretionary, and healthcare—accounted for 60% of the index and together returned -6.6%, just below that of the full index.

The investment pace in first half 2022 declined to its lowest levels since 2010 as valuations fell and LPs pivoted more toward developed markets. Companies in healthcare, IT, and consumer discretionary garnered over 77% of the capital invested. Since the inception of the emerging markets index, managers have only allocated 47% of capital to these three sectors. The discrepancy is due to a recent significant increase in healthcare investment reaching 34% of capital (compared to 14% long term) and IT, which received 28% (compared to 13% long term).

Countries

China remained the largest country in the Emerging Markets PE/VC index by a considerable margin as of June 30, 2022. The four meaningfully weighted countries ranged from China at 41.6% to South Korea at 5.1%; India and the United States made the cut, representing 9.6% and 8.5% of the index, respectively (Figure 9). Hong Kong and Japan were just shy of the 5% threshold, two countries that often remain within one percentage point of the list.

Companies in India received 16% of the capital, significantly more than its long-term norm of 9%. This increased allocation is indicative of a growing shift away from China amid its slowing economy and geopolitical tensions, and interest in an expanding private investment landscape in India. After attracting 50% of the capital invested during first half 2021, China-based companies garnered only 45% and 29% in the following two six-month periods. Within the same timeframe, India’s allocation grew from 5% to 14% to 16% in the most recent period. About 13% was invested in each of the other two meaningfully weighted countries, South Korea and the United States.

On a gross dollar-weighted basis, when combined, companies based in China, India, South Korea, and the United States returned -5.6%, beating out the full index by about 50 basis points in first half 2022.

M&A: THOUGHTS ON THE CYCLE, UNCERTAINTIES, AND RESOLUTIONS

COMPANIES AND MARKETS

By Tom Abrams, CFA  |  January 19, 2023

https://go.factset.com/hubfs/mergerstat_em/monthly/US-Flashwire-Monthly.pdf

FactSet’s U.S. Mergers and Acquisitions (M&A) data suggested continued weakness in the M&A markets as 2022 progressed. After running down roughly 20% in the first half, deal counts were down 40% year/year by November with some acceleration in the decline as the year ended. The more solid first half was due in part to transactions already in motion heading into 2022. Deal values ran about 50% lower year/year in 2022’s second half, which points to average deal size declining in line with typical downcycles.

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SOURCE: FACTSET

Looking to M&A Advisors for Cycle Clues

We can look to public advisor and bank commentary for investment banking trends and issues. When entering a downcycle, M&A intentions are often in place, relatively solid M&A news continues, and advisers continue to report profitability. The first half of 2022 then didn’t look too threatening as conversations on large cap M&A—the driver of profitability for advisers and bankers—continued.

As a typical downturn continues and uncertainties grow, fewer M&A deals are announced. Publicly-traded advisors will often then highlight continued conversations (albeit no mandates), wide buyer/seller valuation differences, extended timeframes for deals to close, more caution in bank and private credit (especially for large deals), and economic uncertainties.

Indeed, in third-quarter conference calls the investment banks were increasingly indicating that deal backlogs, despite active conversations, were not being maintained. It was said that the M&A environment had stabilized in summer 2022 but also that September brought more economic uncertainty, inflation, interest rate changes, and unresolved energy challenges that led the business to turn down further. At the same time, bank lending was said to be more selective, private credit more cautious, and emerging markets more sharply slower.

Buyer/seller valuation differences, however, were said to be closer, and the impact of higher interest rates for the financially stronger firms didn’t seem to be an issue. The level of rates was acceptable relative to a longer-term history of rates, albeit a period of stability in rates was needed to build confidence. Just when would rates peak and at what level? At the same time, financing for larger deals was seen as more difficult to get given reduced market liquidity and credit concerns at banks—and even at stronger at private equity houses.

Late fourth quarter advisor announcements about reduced bonuses and likely layoffs continued the evolution of this downcycle. Concerns about advisor profitability might have contributed to an initial reduction in employee compensation plans, but the extent of the recent layoff indications could be indicative of how long M&A advisors expected the downturn to last.

In terms of duration, it makes some sense that a firm wouldn’t lay off a meaningful number of bankers if the downturn was expected to last only a year. The cost to rehire would be a negative.

Uncertainties and Potential Resolution

Cycles are oscillations between optimism and pessimism, with the waxing and waning of uncertainties and risks indicating degrees of pessimism. When a downturn might end hangs over most downcycles in the early stages. As those uncertainties are resolved or reach their nadir, the environment looks towards the next upcycle.

Key uncertainties that could be considered in the current down cycle—which appears more complex compared to previous cycles—include:

Conclusion

M&A in 2022 was a solid down year with negative trends accelerating in the second half. While the uncertainties are different and perhaps more complex in this downcycle, the M&A market will eventually adjust to them and, as the uncertainties diminish in time, recover into another upcycle.

In 2023, we may see more buyer/seller agreement on valuations, clarity on the trajectory of interest rates and inflation, better ESG standards and disclosures, the end of the Russian-Ukrainian war, and perhaps some stability in corporate cash flows. Altogether, these positives could put the market on better footing heading into 2024 before the next U.S. presidential election.

Though more restructuring transactions are important to keep investment banker books full, these can often be lower margined and/or smaller in size. Other business areas the publicly traded banking houses mention as improving to offset lower M&A activity include advisory activities on debt, private capital fundraising, shareholder interactions, activist defense, capital markets, equity sales and trading execution, and wealth management.

MARKET UPDATE

Better Investing Opportunities Coming Your Way in 2023

5 new themes for portfolios, including bonds, China, and active management.

Better times for investors are coming in 2023.

That’s not to say there won’t be continued volatility or another leg down of the bear market in stocks or even an economic recession. But after the annus horribilis that was 2022, money managers and strategists say there are now more compelling opportunities to pick and choose from among different asset classes.

“The 2022 downturn has set the stage for a much improved long-term investing environment,” says Philip Straehl, global head of research at Morningstar Investment Management.

Among the themes worth watching in 2023:

1. At long last, a “stock-pickers” market?

2. Bonds are back.

3. A bull in China’s stock market.

4. Building back at home with infrastructure plays.

5. Emerging markets re-emerge as a winner.

5 Intriguing Opportunities

It is hard to imagine a more brutal year than 2022, which saw U.S. stocks enter a bear market, bonds down by double digits, and overseas investments walloped by the strong dollar.

Investors found few places to hide as inflation and rising interest rates wreaked havoc with even the most risk-averse portfolios. The popular 60/40 portfolio of stocks and bonds failed to provide protection. Even the passive indexing strategies that investors have come to favor were heavily skewed toward some of the worst-performing sectors of the year, technology and communication services among them, and extremely underweight the best-performing energy sector, leaving holders more exposed to risk than they might have realized.

On a positive note, the collapse of the FTX cryptocurrency exchange and the disruption in the cryptocurrency market did not lead to financial contagion and instability, nor did the meltdown in the U.K.’s gilt—or bond—market in late September. The latter involved leveraged bets on liability-driven investment derivatives by pension funds, which required rescuing by the Bank of England.

Heading into 2023, bearish sentiment among investors is at the highest it’s been since tracking such data started 35 years ago, says Paul Hickey, a co-founder of the independent investment research firm Bespoke Investment Group. The American Association of Individual Investors Sentiment Survey has been below its historical average every week this year, he says. “That’s never happened since the survey started in 1987.” From a contrarian’s point of view, that points to positive surprises.

“If you thought 2022 was eventful, 2023 promises to be an intriguing sequel,” says Hickey.

Now, investment strategists are more sanguine about a range of opportunities presenting themselves in the wake of the carnage, even though they remain clear-eyed about the continuing risks posed by inflation, interest rates, and a possible recession and about the need to be highly selective.

TARA, or “There Are Reasonable Alternatives,” is the new mantra, taking the place of TINA, the “There Is No Alternative” approach to investing. TINA had benefited stocks in the low-interest-rate environment that had dominated investing trends since the global financial crisis.

Return of the Stock-Pickers

With every passing market cycle of underperformance against index funds, the refrain of active managers of stock funds has been, “Wait ‘til next year.”

Unfortunately for investors in many actively run portfolios, it’s been a long wait.

Will 2023 finally be the year where stock-picking matters more than broad market performance?

Some strategists say that, with the markets expected to remain volatile and overall returns likely to be low, the time could finally be right for active management to have a positive impact on a portfolio.

Uncertainty surrounding the persistence of inflation and interest rates and the likelihood of recession will require investors be more selective about the regions, sectors, and individual stocks and bonds they pick than they have been in recent times, says Maria Vassalou, co-chief investment officer for multi-asset solutions at Goldman Sachs Asset Management.

That, she says, favors good old-fashioned stock-picking and active management styles rather than passive approaches.

“These opportunities may transcend the usual categorizations of value and growth or particular industries and instead be rooted in companies with effective operations and healthy balance sheets, regardless of sector or style,” says Vassalou.

“We are likely facing a market in the coming year that is less thematic,” says Jeremiah Buckley, portfolio manager for U.S. growth and income and balanced strategies at Janus Henderson Investors.

“Rather than broad groups of stocks leading based on general trends or factors, we believe relative performance will be more dependent on dynamics at the individual company level. In this market, innovation in products and services, effective capital allocation, and management’s ability to contain costs and gain productivity and utilize capacity at efficient levels will all be integral in determining companies’ growth,” he continues.

Under the hood, Wall Street consensus sees little earnings growth being generated by the stocks that represent the U.S. broad market, and many expect the market in 2023 to be flat at this time next year.

As David Kostin, chief U.S. equity strategist at Goldman Sachs Research, wrote in his 2023 investment outlook, there will be “less pain, but no gain” in 2023. Under that scenario, he advises investors to own defensive sectors—healthcare, consumer staples, and energy—that have low-interest rate risk. He also recommends stocks that benefit from decelerating inflation such as banks and pharmaceutical biotechs. Also, investors would do well to seek out stocks with resilient margins such as drugmaker Eli Lilly LLY and Lamb Weston Holdings LW, which makes frozen potato products for restaurant chains, as examples.

Time to Invest in Bonds

For bond investors, 2022 was the worst year in history. But now they’re back.

Bonds haven’t been this attractive since the 2008-09 period, says Morningstar’s Straehl, with yields on the 10-year U.S. Treasury at 3.67% recently, after rising to the 4% level for a stretch in October and November.

The higher yields in the wake of last year’s brutal losses in bonds now offer “meaningfully positive total return prospects after inflation—following an extended period of not keeping up with consumer prices,” says Straehl.

U.S. fixed-income markets, including U.S. Treasuries, corporates, and Treasury Inflation-Protected Securities, or TIPS, hold particular appeal for their improved risk/reward profile. And “major investment-grade bond markets are priced to deliver a return after inflation of 1.5%-2.0% over the next decade,” says Straehl.

Ken Leech, chief investment officer at Western Asset Management, also highlights the attractiveness of bond yields, especially amid deep investor pessimism that is reflected in widening spreads, or the difference between yields on corporate bonds and U.S. Treasuries of similar maturities.

“Despite yields on almost all fixed-income sectors being at one- or two-decade highs, investors continue to fear the worst,” he says. Concerns about persistent inflation and possible recession are making U.S. investment-grade credits appealing, particularly in the banking and energy sectors, he says. “Corporate fundamentals may have peaked, but they are coming off a strong starting point,” says Leech.

A Potential China Reopening Play

The reopening of the world’s second-biggest economy as its leadership eases restrictions after three years of zero-COVID lockdowns could give a tremendous boost to the country’s domestic growth and to economies worldwide as factories reopen, supply chains unsnarl, and Chinese consumers begin to spend more.

“China, after a hesitant start, will likely see much improved economic growth in 2023, while most of the world will be sluggish,” predicts John Vail, chief global strategist at Nikko Asset Management.

In recent weeks, China has shifted from a zero-COVID policy to a living-with-COVID policy. It most recently announced that, effective Jan. 8, it will drop the quarantine mandate imposed on overseas travelers entering the country, requiring only a negative result from a PCR (polymerase chain reaction) test taken 48 hours before departure. More incoming flights will also be allowed.

“Maintaining zero-COVID was increasingly intolerable,” says Olga Bitel, global strategist at William Blair & Co., a boutique investment management firm. “In the absence of growth, China’s GDP was 5% to 7% below what it would have been.”

In the past month, since China’s leadership started easing restrictions, the SPDR S&P China ETF GXC, which tracks an equity index based on the Chinese composite market, is up 11.5% at a recent $79.85. Still, it is off nearly 23% for the year to date.

Bitel notes there will be a global middle class of 250 million consumers who have been cooped up for three years who will be ready to travel and spend. “That is a non-negligible force,” she says.

At the same time, Bitel says a China reopening “further complicates the Fed’s job” as it could add to inflation pressures. Already, amid China’s moves, oil prices reached a three-week high in the final days of 2023.

Bridging Into Infrastructure Stocks

Another theme on the radar of many money managers and strategists are infrastructure investments, where the pandemic and its aftereffects laid bare shortcomings around the globe. Infrastructure assets are categorized as alternative investments and are private or public companies involved in developing or running physical assets, such as ports and airports, or providing energy supplies, such as utilities and oil and natural gas companies, transportation systems, and certain aspects of technology networks.

Russia’s war against Ukraine highlighted national security vulnerabilities in the energy sphere, and China’s lockdowns disrupted the flow of vital technologies. The major push to transition from traditional energy sources to renewables is another big driver of the interest in infrastructure assets.

New infrastructure projects will be at the center of efforts to create self-sufficiency in key areas such as increasing energy capacity in the United States and Europe, improving transportation and trade routes as countries reposition factories, enhance communication technologies, and expand electrification capabilities to meet climate goals.

Macquarie Asset Management names infrastructure as among its top three investment picks for 2023, along with fixed-income and agriculture.

“Infrastructure is a standout,” said Ben Way, group head of Macquarie Asset Management, in an outlook piece. “It offers inflation protection, defensiveness, high yield, and exposure to structural growth drivers, all of which should be attractive to investors in 2023.”

“Infrastructure should benefit from several macro drivers in 2023 and beyond,” according to a report by comanagers for ClearBridge Investments’ Global Infrastructure Strategies.

The managers call the U.S. Inflation Reduction Act of 2022, passed by Congress in August, “the most significant climate legislation in U.S. history.” They say, “We believe it will be industry transformative for utilities and renewables, in particular. We already see its impact in the 2023 capital expenditure plans of utilities, together with the forward-order books of companies involved in the energy transition, such as renewable, storage, and components suppliers, increasing their growth profile.”

Maria Vassalou, co-CIO of multi-asset solutions at Goldman Sachs Asset Management, notes the Biden administration’s “embrace of a more muscular industrial policy,” which uses tax incentives and subsidies to support vital domestic industries and infrastructure. She mentions the passage of the Chips and Science Act, signed into law in August, which provides support for microchip makers and advanced semiconductor technologies, as another example of the new policy of supporting critical industries to protect national security.

And the folks on Nuveen’s global investment committee highlighted public infrastructure investments as its highest-conviction preference in 2023, noting, “regulated utility revenue tends to be relatively decoupled from the economy and can experience growth from rising capital costs and policies related to energy transition and the Inflation Reduction Act. We also like midstream energy and waste investments for their growth and inflation-hedging characteristics.”

Emerging Markets for Added Diversification

Approaching 2023, the buzziest of all asset classes is emerging markets. It’s hard to find an investment manager not recommending some exposure to the group.

While U.S. stocks are a lot less expensive this year than last, that’s not to say they’re inexpensive, says Straehl of Morningstar. Bigger bargains can be found overseas, especially in the emerging markets, he says.

Vanguard’s Investment Strategy Group expects emerging-markets growth of 3.4% in 2023 that will “significantly outperform” developed-markets growth of 0.3%. And for the next decade, the Vanguard analysts expect returns from emerging markets of between 7% and 9%, 2.3% higher than U.S. equities.

Vanguard now expects emerging markets to deliver returns on a par with non-U.S. developed markets and views emerging markets as an “important diversifier in equity portfolios.”

Emerging-markets equities have a lower correlation with U.S. equities than developed ex-U.S. markets, the analysts at Vanguard note. The asset class is attractively priced for the first time since the pandemic began in early 2020 after declining by nearly 22% in dollar terms this year.

Morningstar’s Straehl says there is “significant opportunity within emerging-markets equity.” He expects the stocks to deliver inflation-adjusted returns of about 7% in the next decade and has upgraded the firm’s conviction level on the asset class to “Medium to High.”

Alastair Reynolds, portfolio manager for global emerging markets at Martin Currie, says there will be wide divergences in performance across the regions that comprise the emerging-markets class. India, he says, is set to deliver the strongest growth in the coming year on solid domestic demand. China, too, should see a pickup in domestic growth.

Reynolds says the asset class held up well at the country and sector levels during challenging times amid “significant changes” in investment conditions the past few years.

“We remain excited by the powerful combination of technology adoption, urbanization, and services sector growth that is evident in emerging markets,” he says.

In his presentation last Wednesday (November 30) at the Brookings Institution, in Washington-DC, Jerome Powell, president of the Federal Reserve (Fed), signaled a smaller increase in the US basic interest rate as a decision for the next FOMC meeting on December 14. Expectations now converge to an increase of only 50 basis points this time, after four consecutive meetings with increases of 75 basis points. From almost zero in March of that year, the basic rate would end the year in the range between 4.25% and 4.5% per annum.

On the other hand, Powell noted that inflation in the US remains high. He mentioned an estimate that, in the 12 months up to October, inflation in personal consumer spending was at 6% per year. Interest rates will have to reach restrictive levels enough to bring inflation down to 2% a year. He mentioned that there is still more ground to cover by the Fed, what suggests that there will be some additional increase of interest rates in 2023.

Monetary tightening is aimed at slowing demand growth relative to aggregate supply, he said, which will require a sustained period of below-trend US economic growth. Despite the monetary tightening and slower pace of growth this year, he was still not seeing clear progress in curbing inflation.

Powell's presentation divided the focus between inflation and the job market. The motivation for this was evident when he addressed the three core components of the inflation rate: goods, housing, and services other than housing (Figure 1). While the core inflation of goods declined from high levels throughout the year, housing services continued to rise at a rate of 7.1% in the last 12 months. Powell noted, however, the substantial drop in the pace of price rise in new leases since the middle of the year.

Figure 1 – Components of Core PCE Inflation

Source: Powell (2022).

Powell highlighted the services less housing component, the largest one, making up more than half of the core price index. It includes education, health services, haircuts, hospitality and so on. He attributed a very large role to this component in projecting the evolution of the core of the index.

As salaries constitute the main cost in these services, it follows the importance of observing the labor market to analyze inflation in this category. According to Powell, at the moment the demand for workers far exceeds the supply of available labor, which has been accompanied by a rise in nominal wages well above what would be consistent with 2% inflation over time. Therefore, a restoration of balance between supply and demand in the labor market would be a relevant item to consider inflation to be contained.

The report on non-farm payrolls – known as the “jobs report” – released last Friday corroborated Powell’s points about the job market, showing better-than-expected job creation and accelerating wage growth. Despite slowing in November, U.S. jobs growth beat expectations. Average salary gains registered an annualized increase in the last three months above the one that occurred in the last twelve months (Figure 2).

Figure 2 – 3-month percent change in average hourly earnings in all private industries

The unemployment rate remained stable at 3.7%, but the labor force participation rate fell slightly from 62.2% to 62.1%, down from 63.4% in February 2020, before the pandemic. The “great resignation”, as the mass exit of workers from the labor market during the pandemic became known, has not been largely reversed.

In the Brookings presentation, Powell mentioned a “shortfall” of about 3.5 million people in the workforce compared to pre-pandemic trends. More than two million of those absent would correspond to an “excess of pensions” in relation to what could be expected due to an aging population. Among the reasons for this, in addition to greater concern for health by older people and difficulties in adapting to changes in the work environment, he cited gains in stock markets and property values ​​in the first two years of the pandemic as factors increasing personal wealth and facilitating early retirements. About the remaining one and a half million workers absent from the offer, he cited the rise in deaths in the pandemic and the deep decline in the net inflow of immigrants.

He also said that the Fed does not have the tools to increase the workforce, leaving it with instruments that operate on its demand to achieve balance. With the opening of jobs being at a level of 1.7 for each person looking for work, the compression in demand would still be relatively distant.

Powell justified in advance the reduction in the pace of increase in the basic interest rate in December, mentioning the time lag between monetary policy decisions and their effects on the economy, which is quite uncertain, and the fact that the rapid and intense tightening so far this year has yet to be felt. However, he noted that what matters most is how much it still must rise and the length of time it should remain tight.

The stakes are split between those who think FOMC rates will go up to 5% or more before a break. If the pause is premature, there is a risk of a future spike in inflation and an even greater tightening afterwards, as occurred in the Volcker era. If it passes the point, the macroeconomic slowdown and the increase in the unemployment rate will be accentuated.

Eyes will evidently also be turned to the financial repercussions of rising interest rates. In this regard, attention is drawn to the fact that longer interest rates – such as those for 10-year Treasury bonds – are far from reflecting the extent of the rise in basic interest rates.

However, it is in the labor market that the Fed's monetary policy script will be written. Judging by Powell's presentation and given outstanding fears of price-wage spirals.

How the EV/EBITDA multiple by sector is calculated?

The EBITDA multiple for a specific sector is calculated by dividing the total enterprise value of all sector companies by the total sum of annual EBITDA of the companies.

The enterprise value is calculated by adding the market value of a company’s debt to the company’s market capitalization and then deducting cash (and cash equivalents) that the company is holding. The multiples on the table above are trailing twelve months, meaning the last four quarters are used when EBITDA (earnings before interest, taxes, depreciation and amortization) is calculated.

Using EV/EBITDA to value companies

Enterprise value to EBITDA is a popular multiple that is used to measure the value of a corporation. The ratio can be seen as a capital structure-neutral alternative for Price/Earnings ratio. When valuations of different companies are compared to each other, the enterprise multiple is often considered more suitable than P/E. Using P/E ratio for comparative analysis can be misleading due to different amounts of leverage, different accounting practices related to depreciation and different tax rates.

The multiple is most commonly used to evaluate industrial and consumer industries. It is more rare to use the ratio for financial or energy companies. For oil & gas companies, there are various industry specific valuation multiples like EV to Reserves, EV to Production and EV to Capacity. Banks and insurance companies are most commonly evaluated using the price-to-book ratio.

Reflections and assessments on the reduction of monetary stimuli by the Fed

• of the supporters of the statist and interventionist culture who saw in these policies the power of the public hand on the governance of the economy, while in reality it is only the sign of desperation of the political and economic leaders who seek in this way to revitalize an economic system that has become wrapped up and that without structural interventions it is not able to resume a virtuous path and risks, instead, also dragging into the crisis the countries that have driven growth in recent years having greater development potential (China, India, Brazil, etc. .);