TBG Monthly Market Color

Dear Friends,

Over the past two weeks, the market has seen headlines and fears of slowing economic growth.
Despite these legitimate concerns, there have been pockets of out performance that can be captured through investments in individual companies – an area we seek to take advantage of.
In the public markets, investors must consider both valuations (i.e., the multiple the market is willing to pay for a company’s stream of profits) and the forecasted estimates of a company's revenue and profit.
Regarding valuations, we believe recent results suggest valuations are starting to stabilize.
Specifically we observed that companies that have sold off sharply to start the year have rebounded on quarterly results that were largely in line or even below expectations.
Notably, Facebook, PayPal, and Texas Instruments all saw share price rallies after a reduction in estimates (see Figure 1 below for a chart on earnings revisions vs. stock price reaction on the day of earnings).
However, there are concerns of slowing economic growth, which would pressure economic and company estimates.
Economists and investors find it challenging to forecast the slowing demand because of the large step up in profits we’ve seen in the S&P 500 since 2019 (see Figure 2 for a chart of S&P 500 Earnings per Share over time).
To give a real-world example, Home Depot, the home improvement company, did $110B in sales in calendar 2019 – last year it did ~$150B, a 35+% increase in two years, driven perhaps by sustainably strong housing demand.
Some of this increase is also explained by the rise of prices. And on the positive side, we note the US consumer remains healthy with about $2 Trillion in excess savings accumulated since the pandemic began per recent reports.
Still investors are struggling with what a good baseline is and what multiple that should trade for.
Over the history of the US markets, on average recessions have caused about a 15% contraction in company profits from the pre-recession peak to the recession trough (see Figure 3).
Once the recession hits and the recovery begins, forward estimates have on average landed about -3% below the prior pre-recession peak. So typically, all economic progress is not lost during a recession, though the magnitude varies as you can see.
Finally, Figure 4, looks at historical performance of Russell 1000 Growth vs. Russell 1000 Value indices. We note the strong long-term track record of growth and believe investors could benefit from exposure here in a period of contraction.

As always, please reach out with any questions or if you're interested in learning more about our strategies.

Thank you,

The Bycoff Group

Sources: Figure 1, Figure 2 and Figure 4 pricing and estimate data per Bloomberg, Figure 3 per BofA research.