US – Macro Backdrop Remains Unfavourable | Harris Fraser
Research Insights
22 November, 2022
US – Macro Backdrop Remains Unfavourable

Although the overall macro backdrop has not changed from previous months, but the US markets had a strong rebound in the month, as investment sentiment improved on anticipation of easing monetary tightening. Over the month of October, the Dow, S&P 500, and the NASDAQ gained 13.95%, 7.99%, and 3.90% respectively.

Although the headline CPI YoY figures has slightly retreated, it continued to stay elevated, the stickier core inflation also stayed above 6%, expect inflation to linger for longer. In response, the Fed has continued the monetary tightening, but the overheating labour market suggests a low chance of a policy pivot in the short term. The higher interest rate would put further pressure on corporate earnings and equity market valuations, and the ongoing quantitative tightening is another major concern, the reversal of the massive liquidity injection into the market will continue to weigh on valuation multiples.

Apart from monetary policies, as leading indicators suggest, recession risk is material, which is further amplified by the rapidly tightening monetary policies. Referencing past recessions, corporate earnings tend to fall materially on average. At the moment, although the Big Tech had a disappointing quarter, there has yet to be significant downward earnings revise on other segments of the market. As current equity prices have not reflected falling corporate earnings due to recession, we see risks of further downside in equities. Although short term rebounds are possible, we do not see any material shift from our original base case, risk factors remain in place, we would continue avoid overweighing in the market for the time being.


 

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