US stocks are starting 2023 at much cheaper levels after investors show their biggest interest in Wall Street in 14 years, but the potential for a recession combined with higher interest rates means equities may not be priced low enough to lure investors.
Since the S&P 500 reached an all-time high a year ago, the index's price-to-earnings ratio has fallen over 20 per cent from its peaks to levels closer to historic averages.
Some investors remain sceptical. Stocks may be more expensive than they appear if current earnings estimates do not fully account for any economic slowdown, while any downturn could further dampen what investors are willing to pay for equities.
Even so, a surprise drop in the US unemployment rate reported on Friday seems to have raised optimism about a soft economic landing.
“Valuations have corrected, but they are still not compelling relative to the macro challenges that exist,” said Keith Lerner, co-chief investment officer at Truist Advisory Services, which rates fixed income as more attractive than equities.
“At best, you can say that valuations are average,” Mr Lerner said, “but the question I think you have to ask yourself is average enough given elevated recession risk?”
The S&P 500 tumbled 19.4 per cent in 2022, as the Federal Reserve's aggressive rate hikes designed to tamp down 40-year high inflation punished asset prices. As of midday Friday, the benchmark stock index was 0.8 per cent firmer in the first week of 2023.
The market's 2022 slide cut the ratio of price to forward earnings estimates to around 17 from about 21.7 a year ago, according to Refinitiv Datastream. The current level of 16.3 remains slightly above the index's 15.8 average of the past 20 years.
Valuations may still be too high if a recession comes to pass, as many on Wall Street expect. Fund managers in last month's BofA Global Research survey cited a deep global recession and persistently high inflation as the market's biggest risks, with a net 68 per cent forecasting a likely downturn in the next year.
UBS economists forecast a recession from the second through fourth quarters of this year, “as rate hikes push a vulnerable economy into contraction”.
“As growth deteriorates considerably into Q2/Q3, we assume the multiple falls towards 14.5 [times],” UBS equity strategists said in a note. Combined with an expectation of weakening earnings estimates, that would lower the S&P 500 to 3,200, UBS said, roughly 16 per cent below current levels.
Any recession could pressure corporate profits more than is factored into projections. Consensus analyst estimates call for a 4.4 per cent increase in earnings this year, according to Refinitiv.
Yet during recessions, earnings fall at an average annual rate of 24 per cent, according to Ned Davis Research. If estimates are overly rosy, that means the price-to-equity ratio is higher than it appears, making stocks seem less attractive.
The profit picture will start to become clearer as fourth-quarter earnings season kicks off next week. Reports are due from banks Wells Fargo and Citigroup, healthcare titan UnitedHealth Group, asset manager BlackRock and Delta Air Lines.
The 2022 surge in interest rates also could undermine stock valuations by making relatively safe assets like US Treasuries more attractive alternatives. Yields on benchmark Treasuries jumped to 15-year highs last year after a long period when relatively safe assets yielded little.
“The problem with the valuation analysis right now is the old saying was there is no alternative to stocks because interest rates were so low,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
With interest rates “significantly higher than they were the last decade … that higher multiple you used to pay for stocks may not be as justified”, he said.
The equity risk premium, or extra return investors expect to receive for holding stocks over risk-free government bonds, has become less favourable over the past year, according to Mr Lerner.
The current premium coincides with a 12-month excess return of 3.5 per cent for the S&P 500 over the 10-year Treasury note, but “downgrades to the economy and earnings remain risks”, he said in a note.
The S&P 500 rose 1.7 per cent on Friday after the Labour Department said that the unemployment rate last month was a lower-than-expected 3.5 per cent, and November's was a downwardly revised 3.6 per cent.
The problem with the valuation analysis right now is the old saying was there is no alternative to stocks because interest rates were so low
Matthew Miskin,
co-chief investment strategist at John Hancock Investment Management
Non-farm payrolls rose 223,000, beating estimates and still showing a strong labour market, but less than November's 256,000 jobs added.
A cooling of wage increases raised hopes that the Fed will continue to temper the aggressive rate hikes it delivered last year. The market now shifts attention towards Thursday's December consumer price index report, which could also influence the Fed's tightening path this year.
Investors are searching for bargains. State Street Global Advisors prefers mid-cap and small-cap stocks to their large-cap counterparts, said State Street's chief investment strategist Michael Arone.
The S&P 400 midcap index and the S&P 600 small-cap index are both trading at around 13 times forward earnings estimates, well below their respective long-term averages, according to Refinitiv Datastream.
“As you move down in market capitalisation, the valuations become more attractive,” Mr Arone said.
Company Profile:
Name: The Protein Bakeshop
Date of start: 2013
Founders: Rashi Chowdhary and Saad Umerani
Based: Dubai
Size, number of employees: 12
Funding/investors: $400,000 (2018)
Dubai works towards better air quality by 2021
Dubai is on a mission to record good air quality for 90 per cent of the year – up from 86 per cent annually today – by 2021.
The municipality plans to have seven mobile air-monitoring stations by 2020 to capture more accurate data in hourly and daily trends of pollution.
These will be on the Palm Jumeirah, Al Qusais, Muhaisnah, Rashidiyah, Al Wasl, Al Quoz and Dubai Investment Park.
“It will allow real-time responding for emergency cases,” said Khaldoon Al Daraji, first environment safety officer at the municipality.
“We’re in a good position except for the cases that are out of our hands, such as sandstorms.
“Sandstorms are our main concern because the UAE is just a receiver.
“The hotspots are Iran, Saudi Arabia and southern Iraq, but we’re working hard with the region to reduce the cycle of sandstorm generation.”
Mr Al Daraji said monitoring as it stood covered 47 per cent of Dubai.
There are 12 fixed stations in the emirate, but Dubai also receives information from monitors belonging to other entities.
“There are 25 stations in total,” Mr Al Daraji said.
“We added new technology and equipment used for the first time for the detection of heavy metals.
“A hundred parameters can be detected but we want to expand it to make sure that the data captured can allow a baseline study in some areas to ensure they are well positioned.”
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Benefits of first-time home buyers' scheme
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- Discounts on sales price of off-plan units
- Flexible payment plans from developers
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- DLD registration fee can be paid through banks or credit cards at zero interest rates
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Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
How much of your income do you need to save?
The more you save, the sooner you can retire. Tuan Phan, a board member of SimplyFI.com, says if you save just 5 per cent of your salary, you can expect to work for another 66 years before you are able to retire without too large a drop in income.
In other words, you will not save enough to retire comfortably. If you save 15 per cent, you can forward to another 43 working years. Up that to 40 per cent of your income, and your remaining working life drops to just 22 years. (see table)
Obviously, this is only a rough guide. How much you save will depend on variables, not least your salary and how much you already have in your pension pot. But it shows what you need to do to achieve financial independence.
House-hunting
Top 10 locations for inquiries from US house hunters, according to Rightmove
- Edinburgh, Scotland
- Westminster, London
- Camden, London
- Glasgow, Scotland
- Islington, London
- Kensington and Chelsea, London
- Highlands, Scotland
- Argyll and Bute, Scotland
- Fife, Scotland
- Tower Hamlets, London
RESULT
Wolves 1 (Traore 67')
Tottenham 2 (Moura 8', Vertonghen 90 1')
Man of the Match: Adama Traore (Wolves)
WHAT IS A BLACK HOLE?
1. Black holes are objects whose gravity is so strong not even light can escape their pull
2. They can be created when massive stars collapse under their own weight
3. Large black holes can also be formed when smaller ones collide and merge
4. The biggest black holes lurk at the centre of many galaxies, including our own
5. Astronomers believe that when the universe was very young, black holes affected how galaxies formed
HWJN
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FIXTURES
Monday, January 28
Iran v Japan, Hazza bin Zayed Stadium (6pm)
Tuesday, January 29
UAEv Qatar, Mohamed Bin Zayed Stadium (6pm)
Friday, February 1
Final, Zayed Sports City Stadium (6pm)
The Sand Castle
Director: Matty Brown
Stars: Nadine Labaki, Ziad Bakri, Zain Al Rafeea, Riman Al Rafeea
Rating: 2.5/5
RESULTS
Argentina 4 Haiti 0
Peru 2 Scotland 0
Panama 0 Northern Ireland 0
COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
Mohammed bin Zayed Majlis
Killing of Qassem Suleimani
Killing of Qassem Suleimani
Our legal consultants
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
The five pillars of Islam
The story in numbers
18
This is how many recognised sects Lebanon is home to, along with about four million citizens
450,000
More than this many Palestinian refugees are registered with UNRWA in Lebanon, with about 45 per cent of them living in the country’s 12 refugee camps
1.5 million
There are just under 1 million Syrian refugees registered with the UN, although the government puts the figure upwards of 1.5m
73
The percentage of stateless people in Lebanon, who are not of Palestinian origin, born to a Lebanese mother, according to a 2012-2013 study by human rights organisation Frontiers Ruwad Association
18,000
The number of marriages recorded between Lebanese women and foreigners between the years 1995 and 2008, according to a 2009 study backed by the UN Development Programme
77,400
The number of people believed to be affected by the current nationality law, according to the 2009 UN study
4,926
This is how many Lebanese-Palestinian households there were in Lebanon in 2016, according to a census by the Lebanese-Palestinian dialogue committee
THE SPECS
Engine: 2.0-litre four-cylinder turbo
Transmission: eight-speed automatic
Power: 258hp at 5,000-6,500rpm
Torque: 400Nm from 1,550-4,400rpm
Fuel economy, combined: 6.4L/100km
Price, base: from D215,000 (Dh230,000 as tested)
On sale: now
How to watch Ireland v Pakistan in UAE
When: The one-off Test starts on Friday, May 11
What time: Each day’s play is scheduled to start at 2pm UAE time.
TV: The match will be broadcast on OSN Sports Cricket HD. Subscribers to the channel can also stream the action live on OSN Play.
Tickets
Tickets start at Dh100 for adults, while children can enter free on the opening day. For more information, visit www.mubadalawtc.com.
Naga
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The specs
Engine: 1.5-litre turbo
Power: 181hp
Torque: 230Nm
Transmission: 6-speed automatic
Starting price: Dh79,000
On sale: Now
