Federal Reserve Adjustment
On July 26th, 2023, the Federal Reserve raised interest rates by 25 basis points, resulting in a target federal funds rate of 5-1/4 to 5-1/2 percent.
The second quarter U.S. gross domestic product (GDP) was released today (+2.4%) and marked the fourth straight quarter of growth and underlined the resilience of the U.S. economy. Inflation also appears to be declining slowly although it remains above targeted levels. The Federal Reserve has two primary areas of concern, the first is U.S. residential housing, where pricing peaked in June of 2022 but seem to have bottomed in January 2023. Since January, prices have advanced on a nationwide basis. The fundamentals of the housing market center around historically low interest rates that homeowners do not want to give away by selling their homes, and therefore the existing housing inventory is constrained. For potential home buyers, the low supply of homes is driving prices higher despite higher mortgage rates. The Federal Reserve also follows real estate rental prices, which remain elevated.
The second area of concern for the Federal Reserve is the labor market where unemployment continues to be very low and wage growth, while slowing, contributes to inflationary pressures. The Federal Reserve is watching this data very carefully and has indicated that additional rate increases may be necessary to further drive inflation down.
Based upon the Wall Street Journalâ€™s July survey of leading business and academic economists, the probability of a recession in the next 12 months was reduced to 54% from 61% in prior surveys. The resilience of the economy and dropping inflation were the primary reasons sited. Additionally, there is greater confidence in a soft-landing scenario.
Q2 2023 Corporate Earnings Expectations
Prior consensus predictions among analysts, as reported by Refinitiv, expected aggregate net income for the Standard &Poorâ€™s 500 companies to fall by 6.4% in the second quarter. However, the underlying strength of the economy is causing these estimates to be revisited. FactSet reported this week that positive earnings revisions by companies preparing to report actual earnings figures would reach the highest level since the third quarter of 2021.
This favorable revision in earnings is consistent with Hemispheresâ€™ expectations that the rally will continue to broaden to companies that have not participated in the technology rally year-to-date. We continue to find undervalued stocks and, as always, we invest in industry leading, quality companies on a long-term basis that trade at a discount to their fair market value. We are a global value investment firm with many years investing successfully in this style.
Please feel free to contact us with any questions that you might have.
Hemispheres Investment Management
Rebecca Holden, CFA
Director of Domestic Research
Michael Hart, CFA