US & European Markets Shrink Further

Weekly Market Snapshot

• The developed market sectors took a hit across the board, leading to a downturn in weekly performance. 

Behind the Headlines: What happened?

The penultimate trading week of this month saw the US large-cap stock witness a negative return of -2.91% as of September 22, 2023, with no sector spared on the index. The decline of the S&P 500 last week was driven by the heavy losses in the consumer discretionary (-6.34%) and real estate (-5.31%) sectors. Following the European large-cap stock hitting a high note with a 1.28% gain in the week ending September 15th, 2023, last week’s numbers threw a curveball, painting a bleak picture as it fell into the red, registering a week-over-week loss of -1.78% by September 22nd, 2023, and turning the tables from a bullish green to a bearish red. Notably, all sectors on both indices took a hit, and their collective downward spiral contributed to the overall decline of the indexes.

The Inside Scoop:

The top gainers on the S&P 500 were led by Humana Inc., with a return of 4.95% as of last week, followed by McKesson Corporation (4.41%) and UnitedHealth Group (3.99%). McKesson’s positioning last week followed the announcement that the company’s independent specialty pharmacy focused on rare disease areas, Biologics by McKesson, was selected by GSK as a specialty pharmacy provider for an orally administered drug called OJJAARA used for the treatment of adults with anemia.

S&P 500 Top Gainers (15/9/2023 through 22/9/2023)

Source: Factset

The FTSE Eurotop 100 saw UniCredit S.p.A. take the lead among the top-performing stocks, stealing the show with an impressive return of 7.57%.  The secret sauce behind this stellar performance could be traced to the bank’s announcement last week to buy back 2.5 billion euros ($2.67 billion) worth of its shares. The bank’s capacity to launch such a hefty buyback plan is firmly rooted in its deep pockets and top-notch organic capital generation, which has been strengthened by its strong financial performance, strong asset quality, and a structurally lower cost of risk. It can be argued that UniCredit is all set to ride out the storm during uncertain times and jump the gun by launching part of its 2023 share buyback plan.

Connecting the Dots:

Getting our feet wet on the market fundamentals, it is clear that investor sentiment wields a substantial influence on stock prices, and, consequently, P/E ratios. Concerns regarding surging inflation, climbing interest rates, and geopolitical uncertainties have taken their toll on valuations throughout the past year. After last week’s hawkish statements from central bankers, worries about prolonged high-interest rates have led to increased yields in global fixed-income markets, putting pressure on riskier assets like equities.

However, the P/E ratio of the FTSE Eurotop 100 has held up at an average of 12.38x year-to-date, principally due to its higher proportion of value shares. During an economic downturn, investors tend to switch growth to value shares as their more defensive characteristics make them more resilient. 

As of September 22nd, 2023, the P/E ratio for the FTSE Eurotop 100 stood at 11.65x, slightly lower than the 11.77x reported the previous week. However, when we consider the forward estimate (FY1) of 12.31x, which is notably higher than last week’s P/E figure, it indicates that investor sentiment is currently skewed towards a positive outlook for the market.

Price to Earnings Ratio as of (25/08/2023  –  22/09/2023)

Source: Factset 

Retail sales growth in the US has been on a gradual decline since the fourth quarter of  2022, as households and consumers struggle with high levels of inflation and increased borrowing costs. Hence, we may attribute the absence of significant progressive sales growth in recent months to the slowdown in consumer spending, compounded by the increased costs associated with online sales. Additionally, it has squeezed profits, as retailers continue to combat slowing growth and tightening margins. Connecting US sales growth to market fundamentals revealed that stocks in the S&P 500 continue to experience stable 3-year sales growth, averaging 8.38x from the first trading week of September through to the figure recorded last week. We believe that this sales growth stability of stocks within the index may be reflective of top-line expectations ahead of third-quarter earnings releases. 

S&P 500 3-Year Sales Growth Weekly Statistic (25/08/2023 through 22/09/2023)

Source: Factset

The Bottom Line:

The tightened sales in the US has a strong correlation to the aggressive monetary tightening campaign of policymakers. The Federal Reserve announced its decision last week to leave interest rates unchanged at a 22-year high of 5.25%-5.5%, another indication that an end to the monetary tightening campaign may be fast approaching. However, the Fed hinted that its slugfest with inflation rumbles on, with another rate hike on the cards at its next policy meeting in November. This comes as inflation, presently at 3.7% as of August 2023, continues to print above the targeted 2% rate of policymakers. 

As the broad market index continues its unimpressive run, we anticipate another monumental week, as we expect last week’s interest rate decision by the Fed and jobless claims numbers to remain a talking point this week, ahead of the September consumer confidence data expected on Tuesday and the Q2 final GDP growth rate to be released on Thursday. 

The US large-cap stocks flex their muscles on the competitive strength of the blue-chip companies within the index, but this was thwarted last week as the top 5 gainers saw the absence of the highest market capitalized stocks on the index, such as Apple, Amazon, Microsoft, or Nvidia. Worthy of mention was the continued presence of these bellwether stocks on the loser’s chart for the past two weeks, notably Nvidia, Microsoft, and Apple. Thus, this has contributed to the consecutive weekly performance decline that the S&P 500 has experienced as the third quarter of 2023 gradually concludes. The US large-cap stocks have struggled this month, with the S&P 500 declining nearly 4% in September, on track for its second straight losing month. 

In Europe, last week’s drop of -1.78% mirrors how investors felt about the recent interest rate increase and other economic challenges, as seen in the widespread downturns across the Eurozone. With the index’s roller-coaster ride since the start of the year, it’s clear that the market is like a ship in stormy waters, adapting to every piece of news it encounters. Looking ahead, as inflationary pressures gradually subside, which was the catalyst for the interest rate hike, combined with the moderate sales growth forecast in the European market, we might see the market rebound and finish the coming week in positive territory.

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