The Cambridge Weekly – 20th February 2023

The Cambridge Weekly – 20th February 2023

A dose of realism creeps in

Last week, the UK’s leading stock market index, the FTSE 100, finally passed the psychologically important threshold of 8,000. And yet, after the strong start to the year in January, February has brought consolidation rather than a continued uptrend. We wrote last week that the prevailing ‘Goldilocks’ market sentiment of not-too-hot (growth, inflation), not-too-cold (rates coming down again soon) was replaced by a somewhat more realistic view that rates will in all likelihood have to stay higher for longer than previously hoped. This is because inflation is proving more persistent, despite goods and energy/commodity price rises indeed having proven to be transitory. However, tight labour markets have carried so-called second-round effects from last year’s price shock into the ‘stickier’ areas of service and goods with a high service production component (e.g., food).

Falling profit margins meet declining inflation

The last few company earnings reports for 2022 are trickling in, and at the aggregate level, they look pretty bad. US companies took a big hit in the last three months of the year, and overall profits are either lower or roughly the same as in 2021 – depending on which measure you use. The chart below shows a couple of these measures, as well as some earnings estimates for this year and 2024. The red line is a measure including so-called ‘exceptionals’ and shows that S&P 500 companies ended 2022 in an earnings recession, meaning 2022’s earnings were lower than 2021. Adjusted figures (the broker report) were better but only slightly better.

China post-pandemic reopening update

Chinese investment assets have managed quite a turnaround over the last few months. And the world’s second-largest economy has moved on from being a laggard, with a failing property sector, to become one of the few bright spots for investors in a still-young 2023.