SUMMARY
We are maintaining our defensive equity exposures, with the most consistent dividend growers in the US market remaining our largest off-index position.
- We fear that negative business cycle risks for markets remained underpriced even as analysts’ estimates project a new record high for US corporate profits by the fourth quarter of 2023.
- Even after recent analyst downward earnings revisions for 2023, our own forecast for S&P500 earnings per share (EPS) is about 10% below their full-year view.
- Some investors see either a swift return to or continuation of strong economic growth. Others believe that inflation will remain intransigent despite the US Federal Reserve willing to continue on a rapid monetary tightening course to stop it. These views are inherently inconsistent with one another. Such is the state of this market, trying to balance contradictory signals.
- In our view, it may take some months before share prices fully reflect the lagged impact of past Fed tightening steps to discount the further weakening in business activity that we expect.
- The current unsettled market conditions suggest that our defensively positioned portfolios have the potential to hold value best. Our largest positions remain in the most reliable sources of return for portfolios: investment grade company dividends and coupon payments for the highest quality borrowers. By many measures, these yields are now the highest in 15 years or longer.
