This week has been filled with key economic data and notable events:

• The Fed held its two-day Open Market Committee meeting and as widely anticipated increased the Fed Funds rate by 25 basis points to a range of 5.25 – 5.50%.
• The initial reading of the second quarter US GDP was released this morning showing the US economy grew by 2.4% at an annualized rate.
• June’s durable goods orders rose by 4.7% - over four times the expected amount.
• June’s PCE (Personal Consumption Expenditures Price Index) the preferred measure of inflation by the Fed indicates a soft landing.
• A well-known Wall Street strategist fell on the sword as he acknowledged his 2023 bearish market outlook had been off by 30 – 34% from the current levels.  
• IMF slightly revised its outlook for the world economy.
• The ECB (European Central Bank) hiked rates by 25 basis points and indicated it might be nearing the end of its rate hiking cycle.
• The BOJ (Bank of Japan) surprised the markets by potentially setting the framework for increased interest rates in the near future.
• After a significant reduction in money supply since the record high last July, it turns out M2 had been surprisingly creeping up the last couple of months.
• We are in the height of earnings season. This quarter looks to be the third consecutive with lower earnings. In fact, earnings this quarter are expected to be down approximately 9%.
• 2023 Street consensus earnings are expected to be up only 0.1%, this year. Therefore, this suggests greater growth in the second half of the year.
• Street consensus earnings for 2024, per FactSet, show growth of 12.9%.
• It currently appears as if a strike by the Teamsters against UPS has been avoided, providing a sigh of relief for those concerned over continued economic growth and earnings for manufacturers and retailers.

Based on a barrage of data this week, the recession rhetoric doesn’t seem to hold up, at least not yet. But haven’t economists been warning us of a looming recession since last Spring when rates first began to rise? And even so, the market has rallied year-to-date. Perhaps a slowdown will happen at some point. Clearly not all data is positive. But, for now, it seems the pending recession continues to be pushed further out. At some point perhaps the naysayers will be right. Just not seeing it happen yet. Maybe the Fed is accomplishing the elusive slowdown without outright recession.

Something interesting is happening in the markets. After a narrow-driven rally, whereby a limited number of stocks were responsible for the vast majority of increases in the S&P – primarily due to their significant size in a market-cap weighted index, a broadening rally has begun to take place. As of the end of May, the market-cap weighted S&P 500 was up some 6 times greater than the lesser known equal weighted S&P. Currently that difference has dropped to approximately two times as the rally begins to broaden.

One thing appears certain, the 2023 market rally thus far is not the result of improving earnings, at least not yet, but rather due to a higher multiple investors are collectively willing to pay for those earnings. After all, the S&P’s earnings are anticipated to be about flat this year over last. Eventually investors will begin to look to next year’s forecast which is comforting knowing the outlook for 2024 earnings is brighter.

The market is a leading indicator. Perhaps last year’s ugly returns were due to the expectation of tighter Fed policy and higher rates. Maybe investors are now collectively beginning to price in a less aggressive hiking cycle, and maybe even eventual rate cuts in 2024? Time will tell. In the interim, the market does not look overly cheap based upon 2023 EPS expectations. But as long-term investors, should 2024 S&P EPS hit approximately $245 (as FactSet suggests), the market is trading at approximately 18.6 times NEXT YEAR’S forecast. That precisely matches the five-year average, and a bit higher than the 17.4 ten-year average.

Putting it all together

The economy is likely doing better than many believe, and certainly better than many predicted. Earnings this year are not great – especially considering inflation. But, next year, earnings look to be improving. The narrow market is widening with some of the out-of-favor areas beginning to rally. Wonder if that has anything to do with the increase in money supply the last few months after a dramatic decrease from the record highs set last July? Furthermore, wonder if the recent modest rise in money supply will show up with an uptick in inflation? Many questions. Time will tell. Regardless, the market appears to be a bit rich based upon 2023 earnings and more fairly valued looking all the way out to next year. Interesting times continue…

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