Resilient Q3 earnings helped fuel a rally for equities last week that saw the S&P 500 up 4.75%. Twenty per cent of S&P 500 companies have reported so far, and around 70% have beaten street expectations for both top and bottom lines1. Earnings and margins have held up in the face of an aggressive Federal Reserve and high inflation. With the S&P 500 trading around 15.5x forward earnings, investors see potential value in stocks if earnings can continue to grow. We will learn more on this front in the week ahead: 165 S&P 500 companies will report 3Q earnings, including large index weights Apple, Microsoft, Alphabet and Amazon1.
Investment-grade bonds continued to struggle as interest rates increased again last week, leading to a 1.07% loss for the Bloomberg Aggregate Bond Index. It has been a painful year for most bond investors, but with the 10-Year Treasury now near 4.25% we think forward returns for fixed income now look quite compelling. We urge investors to remain patient with their existing investment-grade fixed income holdings.
While earnings were positive last week, economic data wasn’t nearly as encouraging with housing data, the Composite of Leading Indicators and regional Fed data indicating a weakening U.S. economy2. With inflation still at the highest levels since the early 1980s, the Federal Reserve is likely to continue raising interest rates, which will continue to slow economic growth and thereby impede corporate earnings growth potential. We welcomed last week’s rally, but continue to believe patience and a longer-term perspective will be helpful ingredients for successful investing in Q4 and into 2023 in the face of likely persistent volatility. Bear markets and recessions are necessary for healthy economies and markets. We believe that when the current period of volatility has passed, we will benefit from a more resilient system that can position us for better future growth prospects. However, because we do not know when we will emerge from this volatility Sequoia remains focused on patience, balance and discipline in our strategy management.
Thank you for your confidence in our team,
Asset Management Department
Sequoia Financial Group
Sources: 1. Factset, 2. Ned Davis Research