Stableford Market Commentary: May 2022

Are 2022 earnings turning negative?

Equites rebounded to close out May unchanged, rebounding from down 5.6% intra-month.

Equities Rebound to Flat in May
Exhibit 1 Equities Rebound to Flat in May

Where are we now?

Thus far in 2022 we have had two parts to the equity downturn. Initially, we had a decrease in valuations, driven by higher interest rates. During May, 10 Year U.S. Treasury yields fell slightly in May to 2.85%, from 2.94%, providing an opportunity for equities to rebound on the hopes of a more dovish Fed.

Bond Yields Back off Slightly From 3%
Exhibit 2 Bond Yields Back off Slightly From 3%

Despite this recent bounce, equities remain in a second phase of the downturn where earnings expectations are starting to come down (as shown by the falling earnings revision breadth in Exhibit 3.) The key from here is whether earnings revisions breadth turns negative and leads to a further correction. While consumers remain strong, companies over-earned during the pandemic. Corporate margins remain high but are at from higher labor and commodity costs. Meanwhile, consumer consumption is moving away from goods toward services (see Target’s double guide-down within 3 weeks).


Falling Earnings Revision Breadth; Will it Turn Negative?
Exhibit 3 Falling Earnings Revision Breadth; Will it Turn Negative?

Furthermore, energy and materials are skewing earnings revisions higher, masking some of the weakness. Ex these sectors, earnings are significantly weaker (Exhibit 4). This has already taken its toll in terms of relative performance among sectors year-to-date. We expect it will continue.

Energy & Materials Skewing Net Income Higher
Exhibit 4—Energy & Materials Skewing Net Income Higher


And finally, earnings revisions tend to weaken seasonally after May as companies report 2Q earnings.


Earnings Revision Breadth Seasonality
Exhibit 5 Earnings Revision Breadth Seasonality

Of course, nothing ever moves in a straight line and there are many negatives that could turn positive including China eliminating COVID lockdowns, peace in Ukraine and the Fed slowing its pace of rate hikes. Eventually, all these negatives that are weighing on the market will reverse or be fully priced in. One could argue that most are currently priced in, except the most important one—the Fed—which remains dependent on the pace of inflation.


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This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Justin Thomas
Justin Thomas, CPA has worked for over 15 years as a portfolio manager and analyst managing institutional assets for hedge funds and large financial institutions. He has a MBA and Masters in Accounting from Northeastern University and an undergraduate degree in Economics from Tufts University. Justin is a managing partner at Stableford Capital.

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