2H 2023 Outlook Survey ResultsBy datatrekresearch in Blog
Today’s entire report will be dedicated to reviewing the results of last week’s DataTrek Second Half 2023 Outlook Survey. Thanks to all who participated! A few details, and then on to the results:
- We had a total of 578 responses. The vast majority (548 respondents, 95 percent) came from the DataTrek community, with 5 pct (30 respondents) from social media.
- The survey period was from Monday June 12th to Monday June 19th. While there was a Fed meeting in the middle of this timeframe, it did not skew the results for questions related to future monetary policy or the direction of long-term interest rates.
- There were 10 required questions and one optional question. Each question required one (and only one) response. Possible responses were randomized where appropriate.
- We offered either participation in a raffle for one of three $50 Amazon gift cards (for DataTrek community respondents) or a standard 2-week free trial to the Morning Briefing (for social media respondents) as rewards for completing the survey.
- At a 90 percent confidence interval, the margin of error for this survey is 3 percentage points. Any answers to each question which are within 3 points are therefore not statistically different, and we will discuss them as such.
- Response percentages detailed below may not equal 100 percent, but only due to rounding.
And now, on to the survey results (most popular answer to each question bolded):
Q1: Where do you expect the S&P 500 to end the year?
- +10 percent higher than today: 14 pct
- +5 - +10 percent higher than today: 32 pct
- Within +/- 5 percent from current levels: 35 percent
- -5 to -10 percent lower than today: 13 pct
- -10 percent lower or more than today: 6 pct
Comment (1): Responses here skewed positive by over 2:1 (46 versus 19 percent) when excluding the +/- 5 percent option. The S&P 500 is already up 14 percent year to date on a price return basis, more than the long run average return of a 10-11 percent total return. Worth noting: another 10 percent gain for the S&P from today’s close of 4,389 would take the index to 4,828, essentially the same as January 2022’s all-time high of 4,797.
Comment (2): Jessica’s work on years with strong Januarys (such as 2023) suggests the S&P 500 can continue to power higher in the upcoming third quarter. Since 1980, in the 8 years when the index was up at least 5.5 percent in January (one standard deviation from the long-run mean) it was up in 7 of those years in Q3. The average Q3 price gain was 5.1 percent, and 3.5 pct excluding the 2 best years (1980 and 1989). That would be a slowdown from what we’ve seen in the first half, but still welcome after last year’s drubbing.
Q2: Which geographic region/market cap do you expect to perform the best IN DOLLAR TERMS over the second half of 2023?
- US large caps: 41 percent
- US small caps: 27 pct
- Japanese stocks: 13 pct
- Non-China Emerging Markets: 8 pct
- Chinese stocks: 6 pct
- European stocks: 5 pct
Comment: We were surprised to see US small caps so far up this list, given that the Russell 2000 has underperformed every other option year to date except for MSCI China. Japanese stocks received far more votes than their MSCI All-Country index weighting (13 vs. 6 percent), no doubt in part due to Warren Buffett’s recent endorsement and recent changes to corporate governance rules at the Tokyo Stock Exchange. European and Chinese equities have gone from “must own” to “who cares” with remarkable speed this year, due in both cases to the lackluster pace of China’s economic reopening. The bottom line here is that survey respondents think US small caps have the best chance to be a productive “catch up” trade in the back half of the year.
Q3: Where do you think Fed Funds will end the year?
- Below 4.50 percent: 4 pct
- 4.50 – 4.75 percent: 8 pct
- 4.75 – 5.00 percent: 10 pct
- 5.00 – 5.25 percent: 35 pct
- 5.25 – 5.50 percent: 30 pct
- Over 5.50 percent: 13 pct
Comment: In the aggregate, survey respondents strongly believe that policy rates will end the year very close to where they are now (5.00 – 5.25 percent). It is worth noting that Fed Funds Futures are putting heavy odds (74 percent) on a July FOMC meeting rate hike, which would take rates to 5.25 – 5.50 percent. December contract prices put the highest probability on either 5.25 – 5.50 percent (48 pct odds) or 5.00 – 5.25 pct (36 pct odds).
Q4: Which US large cap sector do you expect to perform the best in the second half of 2023?
- Technology: 40 percent
- Energy: 12 pct
- Financials: 11 pct
- Health Care: 10 pct
- Industrials: 7 pct
- Consumer Staples: 5 pct
- Consumer Discretionary: 4 pct
- Communication Services: 3 pct
- Real Estate: 2 pct
- Utilities: 2 pct
- Materials: 2 pct
Comment: This was the most lopsided result of the entire survey, with respondents overwhelmingly choosing large cap Tech (+3x Energy, the runner up) to outperform over the second half of the year. The sector’s 40 percent response rate is the same as the next 4 groups combined (Energy, Financials, Health Care, and Industrials). No doubt this is due to Tech’s strong gains year to date. Still, if you are looking for contrarian signals in our survey results, this is the clear winner.
Q5: Which US Big Tech stock do you think will do the best in the second half of 2023?
- Microsoft: 20 percent
- Alphabet/Google: 16 pct
- Apple: 15 pct
- Nvidia: 15 pct
- Amazon: 15 pct
- Tesla: 12 pct
- Meta/Facebook: 7 pct
Comment: The 3-point error rate we mentioned in the introduction makes Microsoft the crowd favorite and Meta/Tesla the runts of the litter. The other names are clustered in between. We assume MSFT got the nod due to its exposure to ChatGPT and the promise of generative AI. META is already up 134 percent YTD, second only to NVDA’s 192 pct gain and, unlike the chip designer, it has limited near-term exposure to generative AI.
Q6: Do you think US equities are at the start of a new secular bull market that will extend into 2024 – 2025?
- Definitely yes: 8 percent
- Probably yes: 45 percent
- Probably no: 39 percent
- Definitely no: 9 percent
Comment: Going out to 1 decimal point, the net difference between bullish and bearish responses is 5.2 points (52.6 vs. 47.4), more than the survey’s 3-point margin of error but not enough to say that respondents are overly optimistic about US stocks. Market direction over the second half of 2023 will be a tussle between fundamentally bullish and bearish camps. With the S&P 500 trading for 20x current year earnings estimates of $222/share, stocks are not cheap enough on 2023 numbers alone to merit much bullishness on near-term cash flows. Marginal investor confidence regarding a “new bull market” is therefore a (maybe “the”) tipping point issue for the second half of 2023.
Q7: Where do you think WTI crude oil prices will end the year?
- Under $50/barrel: 1 percent
- Between $50 - $60/barrel: 9 pct
- Between $60 - $70/barrel: 29 pct
- Between $70 - $80/barrel: 46 pct
- Over $80/barrel: 14 pct
Comment: Survey respondents believe oil prices are bottoming out. WTI crude topped out at just over $120/barrel in March/June 2022, started the year at $80/barrel, and closed today at $71/barrel. Stabilizing oil prices could allow Energy stocks to see renewed investor interest and even rally; recall that the sector was the second most popular choice in terms of 2H performance, behind only Tech. From a macro standpoint, keeping oil prices at current levels would also reduce the probability of a US/global recession in the second half of 2023 (more on this topic in a moment).
Q8: Do you think the dollar will generally strengthen or weaken versus other major global currencies (euro, yen, yuan, etc.) in the second half of the year?
- Strengthen: 24 percent
- Stay very close to today’s levels: 48 percent
- Weaken: 28 percent
Comment: The dollar has been stronger than expected year to date, so it makes sense that many survey respondents expressed the opinion that the greenback would remain stable rather than weaken in the back half of 2023. The response to this question also fits with the answers to Question #2, in that a stable or strengthening dollar suggests that US economic growth will be better than in other developed or emerging economies.
Q9: Do you believe the US economy will enter a recession in the second half of 2023?
- Certainly yes: 4 percent
- Probably yes: 31 percent
- Probably no: 57 percent
- Certainly no: 7 percent
Comment: Taking response rates out to 1 decimal point, the tilt here is 64.7/35.3 percent (a 29.4-point difference) in favor of the US economy avoiding the start of a recession later this year. That shows more conviction than our “new bull market” question, which only had a 5.2-point spread. That tells us that it may take more than continued economic growth to persuade some investors that US stocks are in a long-term uptrend.
Q10: Where do you think 10-year Treasury yields will end the year?
- Over 4.25 percent: 4 percent
- Between 4.00 – 4.25 percent: 25 percent
- Between 3.75 – 4.00 percent: 35 percent
- Between 3.50 – 3.75 percent: 25 percent
- Below 3.50 percent: 10 percent
Comment: This question generated a near-perfect symmetry around the current 10-year Treasury yield rate of 3.72 percent. To our thinking, this was the toughest question on the survey. Handicapping how the Federal Reserve’s quantitative tightening program will affect real rates in the second half of the year is extremely difficult. Even if inflation expectations continue to decline, real rates may drift higher and 10-years may very well end the year unchanged from today.
Q11: Bonus question (not required): Have you used any generative AI programs?
- Only ChatGPT: 43 percent
- I have not used either Bard or ChatGPT: 34 percent
- Yes, both Bard and ChatGPT: 22 percent
- Only Bard: 1 percent
Comment: ChatGPT has a definite first mover advantage, at least among the DataTrek community of financial market participants. We were surprised to see that fully a third of respondents (34 percent, to be precise) had not used either, however.
Four takeaways from this survey:
#1: US large caps and Tech stocks look like crowded trades here. That does not doom them to fail, but they are unambiguously the crowd favorites just now. Much – if not all – of this optimism clearly revolves around corporate earnings power, since our survey shows market participants do not expect any measurable change in either Fed policy or long-term interest rates through the back half of 2023. The recent run-up in US large caps will have a healthy reality check in less than a month’s time with Q2 earnings season. Much of the good news on this front is likely baked in already, so holding current levels is our base case scenario as we start 2H 2023.
#2: The consensus view is that Fed Funds are at or very near their peak. Markets have gotten this call wrong several times over the last year. Are they doing so again right now? We do not think so (and neither do many of our respondents), but this is certainly the right question to ask. Continued US labor market strength is the crux of the bull case for the domestic economy and US stocks, but it can easily become the foundation of a resurgent bear case as well. Hot labor markets drive wage inflation, which in turn might cause price inflation to remain stubbornly high. That, in turn, may force the Fed to raise rates more than currently expected and keep their tightening cycle going into 2024. While we are optimistic about the future course of US equities, we think about this issue every day.
#3: Our survey responses suggest investors don’t think there’s a lot of money to be made in fixed income over the second half of the year aside from clipping some coupons, which means capital may well shift from bonds to stocks in Q3 and Q4. As we often say, “money has to go somewhere”. After last year’s simultaneous stock/bond rout, asset owners are still anxious to recoup every dollar they can.
#4: Sentiment around whether we are in a “new bull market” for US stocks is still fairly evenly split, even after this year’s gains and recent new 52-week highs for the S&P 500. Overall, we see that as a positive for equities since there are still many investors who could flip from cautious to optimistic and reallocate their capital accordingly. However, the second half of 2023 will almost certainly have a “recession scare”. They always come along in the later parts of a market cycle, after all. How markets navigate that event will likely determine how close we get to our survey’s generally bullish views.