US Macro Strategy Weekly Report – 13 June 2023

By James Ooi/ uSMART Market Strategist

Over 13 years of experience in buy-side and sell-side of capital markets

Former Fund Manager of renowned asset management firm
Focus on fundamental analysis and macro-outlook for US & Singapore markets
SGX Academy trainer

This Week’s Market Outlook

This week, significant economic data in the United States includes the release of the May Consumer Price Index (CPI) on Tuesday, the Producer Price Index (PPI) on Wednesday, and the retail sales data on Thursday. The market's main focus is on the interest rate decision and dot plot of the FOMC meeting, which is scheduled for the early hours of Thursday morning.
Over the past 20 years, the S&P 500 index has experienced an average decline of 0.44% in June due to seasonality, with a notable drop of 8.39% in 2022 (Figure 1). However, the S&P 500 index has recorded a month-to-date return of 3.81% thus far this year.

Figure 1: Monthly performance of the S&P 500 over the past 20 years.

Source: Bloomberg, 12 June 2023

In June, there was a broad upward trend across all sectors, with notable strength observed in previously underperforming sectors such as energy, industrials, and basic materials, which recorded gains of 5.2%, 6.5%, and 5.78% respectively (Figure 2). If the Federal Open Market Committee (FOMC) unexpectedly decides to raise interest rates on Thursday, it is expected that sectors that have been lagging behind this year, including consumer staples, healthcare, finance, and utilities, will experience a rebound. However, technology-related sectors, which have been benefiting from the expectation of lower rates, may face selling pressure.

Figure 2: Monthly performance of the S&P 500 over the past 20 years.

Source: Bloomberg, 12 June 2023

CME Fedwatch currently indicates a 59.1% probability of a rate hike in July, followed by an expected reduction of 25 basis points during the November FOMC meeting(Figure 3). This would bring the FOMC rate to a range of 5 to 5.25% at the end of year. In the past, technology-related stocks rallied due to the anticipation of rate cuts. However, the equity market has not corrected itself in response to the new narrative of "higher rates for a longer." Market participants may still have confidence in the possibility of further rate cuts by the end of the year, or they could believe that better-than-expected economic growth will drive corporate earnings later this year.
I am of the opinion that the notions of "maybe AI will save us" and "earnings woes are over" are exaggerated. The improvement in the bottom line of companies is primarily attributed to cost-cutting measures rather than top line revenue growth, which means that the improvement in earnings is superficial.

Figure 3: CME Fedwatch

Source: CME Fedwatch

There is still a divergence between bond yields and the S&P 500 index ahead of the FOMC meeting (Figure 4).

Figure 4: S&P 500 and 10-year bond yield

Source: uSMART, Tradingview

The S&P 500 index has rebounded more than 20% since its October 2022 bottom(Figure 5). Statistically speaking, there is a 97% probability that the S&P 500 index will continue to climb in the next 12 months, with an average increase of 18.9%.

Figure 5: S&P 500's 12-month forward return following a 20% rebound.

Source: LPL Research

“The bear market is officially over,” Bank of America's top strategist Savita Subramanian declared in a Friday message to clients. She further revised the year-end target for 2023 from 4,000 points to 4,300 points. However, another strategist at Bank of America, Michael Hartnett, has not capitulated and continues to hold a bearish perspective. He believes that the view of rising earnings forecasts combined with falling rates as “unsustainable.”
While we continue to hold a short-term bearish view, we would like to emphasize the points we made in our previous weekly notes on April 11th and April 18th. We suggested that investors may want to consider implementing a core-satellite strategy. It is important to note that the cash allocation in the portfolio should not exceed 30% in order to avoid missing out on potential investment opportunities in the event that the market continues to rise.
Currently, there are several high-quality companies, such as Apple, Amazon, Visa, Tesla, Costco, and Microsoft, that continue to demonstrate strong long-term EPS growth potential. Investors may consider gradually establishing long-term positions in these companies. Additionally, investors can also explore ETFs like SPY, QQQ, and SUSA to capture some market returns.

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