Markets in Focus

Timely analysis of market moves and sectors of opportunity

January 31, 2022: Playing the long game

“Are we there yet?”
“Have we hit a market bottom?”

These have been by far the most common questions from the past week and also the most difficult to answer. Timing a market bottom is a fool’s errand and the wrong way of looking at the market, said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers.

“The main takeaway of what I can see is we’re finally starting to get toward peak pessimism, and when we start to see that, I think that is the time to start to get opportunistic,” Orton said.

To be sure, the market remains technically oversold and investor sentiment is stuck at the lowest levels since the initial COVID-19 market crash. The front end of the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, curve has inverted, while longer-dated volatility remains nearly unchanged. All of this points to a bounce in the near term, Orton said. But there remains tremendous uncertainty around the U.S. Federal Reserve (Fed) and the path of rate hikes. There are calls for five, six, even seven rate hikes this year — in addition to geopolitical tensions between Russia and Ukraine that could have meaningful implications to energy prices.

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Valuations have moved considerably lower for the overall market, particularly for many higher-duration sectors and industries, while earnings growth remains strong and profit margins healthy.

Rather than looking for “the market bottom,” Orton said, we should instead ask ourselves whether it’s time to be opportunistic. This means being comfortable with the market moving lower in the near term, he said, and standing ready to continue putting capital to work to take advantage of big price swings the market presents. There are many companies that have been thrown out with the bathwater, he said, and there are opportunities to increase exposure to sectors or asset classes that have underperformed despite strong fundamentals. All of the Fed noise and a dogmatic focus on valuation compression has completely ignored a very strong earnings season thus far, he said, particularly for the mega-cap technology companies that have reported and are critical to the direction of the overall market. Strong numbers from the companies reporting this week could help the market sustain a leg higher. Orton also noted that given the strong earnings we’ve had coupled with the downside move in the market, the 12-month forward price-to-earnings (P/E) ratio of the S&P 500 Index stands at 19.2, which is below where we were in February 2020.

Valuations at pre-COVID levels on a forward
price-to-earnings (P/E) basis

S&P 500 12-month forward P/E ratio

Valuations at pre-COVID levels on a forward price-to-earnings (P/E) basis S&P 500 12-month forward P/E ratio


Nasdaq 12-month forward P/E ratio

Nasdaq 12-month forward P/E ratio

Source: Bloomberg, as of 1/28/2022.


Overall, 33% of S&P 500 Index companies have reported fourth quarter results, and the blended earnings growth rate stands at 24.3% (versus the expected 21.4%). More important, Orton noted that, given inflationary concerns in the market, the blended net profit margin stands at 12.0%, which is above last year’s net profit margin of 11.0% and above the 5-year average net profit margin of 11.0%. Even more importantly, looking into the rest of the year, he said analysts expect net profit margins to improve sequentially over the next three quarters. As of today, the estimated net profit margins for the first, second, and third quarters of 2022 are 12.4%, 12.7%, and 13.0%, respectively (according to FactSet).

“I highlight all of these positives since they’ve been overlooked as the market has moved lower,” Orton said. “Valuations have moved considerably lower for the overall market, particularly for many higher duration sectors and industries, while earnings growth remains strong and profit margins healthy. This gives me confidence in putting capital to work in the market, even if there may still be room to move lower in the short term.” He added that he believes that it pays to play the long game, and that there are many values in the marketplace right now. Leaning into quality growth — whether it’s in a growth or value index — has been working and he continues to advocate this strategy going forward, Orton said. Similarly, he suggests thinking about leveraging international markets to get more cyclical and value exposure given meaningfully cheaper valuations, strong earnings growth, and a more accommodative monetary policy backdrop. Orton said he still doesn’t like small caps and needs to see confirmation of an uptrend.

Wrong question: Is this the bottom?
Right question: Is this the time to be opportunistic?

Small caps have fared even worse than technology

Source: Bloomberg, as of 1/28/2022.


Have we reached peak hawkishness?

Fed Chairman Jerome Powell’s comment that “this cycle is different” is certainly an indication that the Fed’s bias is for a steeper tightening. While the statement did not contain any meaningful surprises — it merely rubberstamped expectations for an imminent rate hike — Orton said the news conference sent an unequivocal signal that the Fed’s view has continued to evolve in a hawkish direction. And many forecasters wasted no time further ratcheting up their interest rate hike predictions. The market has now just about priced in five rate hikes in 2022 and the damage from this swift repricing has largely occurred in the equity markets. But Or ton said he is not so sure we’ll get five or more rate hikes this year along with balance sheet reduction. Headline inflation might’ve already peaked, and core could do the same in February or March. If prices on goods, particularly autos, begin to stabilize, core Personal Consumption Expenditures Price Index inflation, could end the year closer to 2% — even if housing costs rise at their fastest rate since 1990.

“I think that that markets have discounted an overly aggressive tightening cycle and we’re probably looking at peak hawkishness,” Orton said. “I think all of the se calls for extreme moves by the Fed are overdone. It’s a popular opinion to have right now, but I would be surprised if you see the Fed be as aggressive as a lot of the more bearish analysts have said they expect.”

This doesn’t mean that it’s time to move back into the higher-duration parts of the market like non-earning, formerly high-flying consumer and tech names. But Orton said it does give him more confidence that the multiple contraction experienced by higher quality tech companies, including most of the mega-cap complex, is probably at or near the end. He said it also gives him more confidence broadly about moving into quality growth names that he expects to continue to perform well. Orton said it’s also worth noting that the high uncertainty around the outlook for policy and the economy triggered a “valuation de-risking” within portfolios (with moves out of o verextended bonds and very expensive stocks), rather than a more typical “volatility de-risking” (characterized by moves into bonds and defensive equities). This sort of rotation is supportive not only of quality but also of income stocks, and we’ve seen this play out year to date, he said.

Within this context, Orton said he continues to watch for opportunities in large-cap technology as we ll as healthcare given its large underperformance and more defensive characteristics. He also remains optimistic on energy and financials, though he repeated that energy could warrant some caution, because its recent outperformance sets the stage for a reversion to the mean in the near term. He said mid caps also look attractive as they’ve underperformed large caps but offer some quality characteristics and valuation discounts on which more active managers can capitalize.

What to watch

It’s another busy week from a market and economic data perspective, Orton said, including the payrolls report on Friday and earnings reports from companies in semiconductors; oil and gas; package delivery; online advertising; auto manufacturing; chain coffee shops; video games; social media; pharmaceuticals; health insurance; managed care; aerospace; hotels and casinos; and stock and options trading.

Monday Euro-area gross domestic product; Germany inflation; Japan industrial output
Tuesday Manufacturing Purchasing Managers’ Index
Wednesday ADP® National Employment Report; Eurozone Harmonised Index of Consumer Prices estimate
Thursday U.S. initial jobless claims; factory and durable goods orders
Friday U.S. non-farm payrolls; unemployment


Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

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The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

The Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

Price-to-earnings (P/E) ratios measure a company’s current share price relative to its earnings per share. The ratio is used to help assess a company’s value and is sometimes referred to as the price multiple or earnings multiple.

Forward price-to-earnings (forward P/E) is a version of the ratio of price to earnings that uses forecast earnings for the P/E calculation. The earnings used in this ratio are an estimate and therefore are not as reliable as current or historical earnings data.

Blended earnings combine actual results for companies that have reported earnings and estimated results for companies that have yet to report.

A blended net profit margin combines actual net profit margins from companies that have reported earnings and estimated margins for companies that have yet to report. Growth investing is a stock-buying strategy that focuses on companies expected to grow at an above-average rate compared to their industry or the market.

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

Equity duration is the cash-flow weighted average time at which investors can expect to receive the cash flows from their investment in a company’s stock. Long-duration stocks include fast-growing technology companies, including those that may not pay any dividends in their early years, while short-duration stocks tend to be more mature companies with higher ratios to dividend to price.

The daily moving average (DMA) is a calculation that takes the arithmetic mean of a given set of prices over the specific number of days in the past; for example, over the previous 15, 30, 100, or 200 days.

Overbought is a term used to describe a security believed to be trading at a level above its intrinsic or fair value.

Oversold is a term used to describe a security believed to be trading at a level below its intrinsic or fair value. A relative strength index (RSI) is a momentum indicator that tracks the magnitude of recent price changes to analyze overbought or oversold conditions in the price of a particular asset. Typically, RSI values of 70 or higher indicate that an asset is becoming overbought or overvalued. RSI values of 30 or below suggest oversold or undervalued conditions.

Core inflation is measured by the Personal Consumption Expenditures (PCE) excluding Food and Energy, Price Index, also known as the core PCE price index, is a measure of the prices that U.S. consumers pay for goods and services, not including two categories — food and energy — where prices tend to swing up and down more dramatically and more often than other prices. The core PCE price index, released monthly by the U.S. Department of Commerce Bureau of Economic Analysis, measures inflation trends and is watched closely by the U.S. Federal Reserve as it conducts monetary policy.

The Purchasing Managers’ Index (PMI) measures the prevailing direction of economic trends in the manufacturing sector. It is created by the Institute for Supply Management (ISM), and consists of an index summarizing whether market conditions as reported in a monthly survey of supply chain managers are expanding, staying the same, or contracting.

The ADP® National Employment ReportTM is a monthly measure of the change in total U.S. nonfarm private employment derived from actual, anonymous payroll data of client companies served by the payroll, tax service and human resources management company ADP. The report measures changes within a group of nearly 26 million U.S. workers and is produced by the ADP Research Institute® in collaboration with Moody’s Analytics.

The Eurozone Harmonised Index of Consumer Prices is a composite measure of inflation in the Eurozone based on changes in prices paid by consumers in the European Union for items in a basket of common goods. The index tracks the prices of goods such as coffee, tobacco, meat, fruit, household appliances, cars, pharmaceuticals, electricity, clothing, and many other widely used products.

The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.

The S&P 500 Top 50 Index consists of 50 of the largest companies from the S&P 500, reflecting U.S. mega-cap performance. Index constituents are weighted by float-adjusted market capitalization.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.


CTA22-0079 Exp. 5/31/2022