US Market Commentary

Ed Mertiri |

Recently a lot of inflation data has raised concerns, not just about how early we have to order Christmas presents, but also around how much negative impact there will be on economic growth over the next year.

The data and increases in interest rates prolonged our forecast for a small and mid-cap break out. The S&P Small Cap 600 index has been stuck in a trading range since the spring. Since then, the valuation has become cheaper as earnings increased while the index price remains range bound. This valuation compression is expected. Inflation and higher interest rates hit early-stage companies harder because of increased capital and borrowing costs.

Large caps are a different story. They have significantly rallied and outperformed the last two weeks. While only about 25% of S&P 500 have reported so far, the early Q3 earnings reports have reassured investors that US companies are able to produce profits in the face of inflation. Investors will likely accept higher valuations for US large caps, the lower risk group in equities. The positive sentiment has been building all week. The S&P 500 is almost back to 22X forward earnings. Wall St analysts will be busy in the coming weeks revising their future earnings if companies keep producing such high surprises. There are early signs of expectations going up. Q1 2022 EPS growth has been revised up from 5% to 5.6% in the last 2 weeks. Q2 2022 also went up from 3.4% to 3.7% EPS growth. The next 2 weeks are the busiest in the earnings season determining if the upward revisions continue.