Fabian Estevez

Like every year, Blackstone, one of the largest alternative investments manager with over $951 bn assets under management, published its 38th edition for their Ten Surprises for the year.

Blackstone defines a Surprise as an event in which the average professional investor would assign a one-third chance of taking place, but which the asset manager believe has a 50% or better chance of happening.

1.    Multiple candidates on both sides of the aisle organize campaigns to secure their party’s presidential nomination. There are new headliner names on the respective tickets for 2024.

2.    The Federal Reserve remains in a tug-of-war with inflation, so it puts the word “pivot” on the shelf alongside the word “transitory.” The fed funds rate moves above the Personal Consumption Expenditures price index (PCE; 4.7% for November) and real interest rates turn positive, a rare phenomenon relative to the last decade, but appealing for fixed income assets.

3.    While the Fed is successful in dampening inflation, it over-stays its time in restrictive territory. Margins are squeezed in a mild recession.

4.    Despite Fed tightening, the market reaches a bottom by mid-year and begins a recovery comparable to 2009.

5.    Every significant correction in the market has in the past been accompanied by a financial “accident.” Cryptocurrencies had a major correction and that proved not to be a systemic event. This time, Modern Monetary Theory is fully discredited because deficits have proven to be inflationary.

6.    The Fed remains more hawkish than other central banks, and the US dollar stays strong against major currency pairs, including the yen and euro. This creates a generational opportunity for dollar-based investors to invest in Japanese and European assets.

7.    China edges toward its growth objective of 5.5% and works aggressively to re-establish strong trade relationships with the West, with positive implications for real assets and commodities.

8.    The US becomes the largest producer of oil. The price of oil drops primarily as a result of a global recession, but also because of increased hydraulic fracking and greater production from the Middle East and Venezuela. The price of WTI touches $50 this year, but there’s a $100 tick out there sometime beyond 2023 as the world recovers.

9.    The Russian invasion of Ukraine continue for the first half of 2023. In the second half, the combination of humanitarian and economic costs on both sides derives in a ceasefire and negotiations on a territorial split begin.

10.    In spite of the reluctance of advertisers to continue supporting the site and the skepticism of stakeholders about the firm’s credit quality, Elon Musk gets Twitter back on the path to recovery by the end of the year.

It is important to mention that this weekly commentary is for informational purposes and does not reflect an investment recommendation by our Investment Committee.

Probability of Recession for the coming 12 Months

Source: JP Morgan

The quarterly reporting season of 4Q22 is about to begin, being a factor that could influence the mood of the markets in the concise term. In this sense, analysts estimate that the S&P 500 companies would have experienced a 4.1% year-on-year contraction in their profits. If this figure is confirmed, it will mark the first time the index has reported a fall in earnings since Q320 (-5.7% YoY). Concerning revenues, prospects point to growth of 3.8% (YoY), representing a considerable adjustment compared to the 6.3% growth projected at the beginning of 4Q22.

Given the lingering concerns in the market about a possible recession, the following question emerges: would analysts have adjusted their expectations for the recently concluded quarter more than usual? The answer is yes. Throughout 4Q22, analysts cut their earnings per share (EPS) estimates by a higher-than-average margin, resulting in a downward revision of ~7%. This number exceeds historical statistics, which indicate that over the last 10 (40 quarters) and 15 years (60 quarters), the average downward revisions were 3.3% and 4.8%, respectively. If we extend the analysis period to the last 20 years (80 quarters), an average decrease of 3.8% is observed. At the industry level, nine of the eleven sectors would have followed a negative revision in their EPS, led by the Materials sector (-18.8% YoY), Consumption Discretional (-13.5% YoY) and Communication Services (-11.8% YoY). In contrast, only Energy and Utilities sectors witnessed a positive revision of 2% for each. 

In this context, full-year 2022 profits would have advanced 4.7% YoY. On the other hand, the current estimate indicates that profits could rise by 4.8% year-on-year in 2023. However, this figure may be revised downwards depending on economic conditions.

Finally, we highlight that the season’s core point will be presented between the last week of January and the first half of February.

Expected growth in profits by sector

Source: Facset

According to the minutes of the December meeting, Fed members confirmed that they are committed to fighting inflation, so they expect to keep interest rates high until more progress is made. In this sense, they expressed the importance of maintaining a sufficiently restrictive policy given that inflation is unacceptably high.

In particular, members stressed that it would be appropriate to continue with the current policy until incoming data ensure that inflation will follow a sustained downward path of 2%, likely to “take some time”. In addition, the members highlighted the following: “given the persistent and unacceptably high level of inflation, historical experience cautioned against the implementation of a premature easing of monetary policy”. 

On the other hand, several participants stressed that it would be essential to communicate clearly that a slowdown in the pace of rate increases was not an indication of a weakening to achieve its objective of price stability or a judgment that inflation was already on a persistent downward path.

Finally, the minutes reflected that no Committee member expects a rate cut during 2023, contrary to market expectations. The market anticipates the possibility of a small reduction that would lead the federal funds rate to 4.8% (vs. 5.1%, updated by the Fed in December). 

Expected Path for the Federal Funds Rate

Source: Goldman Sachs