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Quality is King

April 24 to 28, 2023


Quality is King

April 24 to 28, 2023

Weekly Commentary

Market Recap

  • Equity markets were mixed this week, and all eyes are on the Q1 earnings season with notable hits (big banks) and misses (Tesla) already on the books.
  • Based on the latest tally from Refinitiv, S&P 500 earnings are expected to fall 5% y/y in the quarter, marking a second consecutive quarter below year-ago levels. Results so far have been decent, with just under 70% of companies topping analyst expectations—the bar has been lowered since the start of the year.
  • At the sector level, solid gains in consumer discretionary, energy and industrials compared to a year ago can’t quite offset declines in technology, communication services and health care.


A slight risk-off mood seems to have overtaken markets, and in our view, it’s being driven by a multitude of factors. One is the ongoing conversation about worsening credit conditions, including comments from the U.S. Federal Reserve officials. Another is the job market, which is finally showing some softness, including layoffs, decreasing hiring intentions, and increasing jobless claims. Inflation is still an issue—it’s coming down, but is it doing so fast enough to allow the Fed to pause and eventually cut rates? For now, the answer seems to be ‘no.’ And finally, earnings are still being announced. Last week, we had poor earnings from Tesla and Taiwan Semiconductor, and there have been mixed results in Financials. In that environment, markets are asking—what’s the upside at the moment? The only developments that are likely to drive markets higher in the near term are a Fed pivot or a massive earnings surprise, while markets could go lower if inflation spikes or earnings disappoint further.

Bottom Line: Markets’ risk-off sentiment is based on several issues, and we’re likely to see ups-and-down until some of them are resolved.

Debt Ceiling

On the political front, there’s the possibility of another fight over the U.S. debt ceiling similar to the one that gripped Washington in 2011. For markets, there is risk, because the situation is likely to go down to the last minute before it’s resolved. But compared to 2011, the risk this time may be greater, because Republicans and Democrats have never been so far apart in recent memory. Recall the trouble the House of Representatives had just to elect a Speaker—it took fifteen ballots, unheard of in modern American political history, before Republican Kevin McCarthy was chosen. And it wasn’t just disagreement between parties that caused the delay, but also schisms within each party. Even in the wake of the Silicon Valley Bank collapse, when the Fed, Treasury, and FDIC took action to avert a broader banking crisis, there wasn’t a consensus. Those examples speak to the potentially broader ramifications of the current political polarization.

Bottom Line: The debt ceiling debate could prompt a negative reaction in markets, but our expectation is that a bill to raise the borrowing limit will likely pass sooner rather than later.


The Financials earnings we’ve seen so far confirm, in our view, that there’s been no broader contagion stemming from the SVB crisis. As we thought, the repercussions were largely limited to a handful of banks that didn’t manage their risk well. The scare came from people believing that they needed to move their deposits from smaller banks to larger, safer institutions, and that’s exactly what transpired. Now, the stabilization of the banking sector is underway, and the government and the big banks have shown that they are willing to step in when needed. The big takeaway is that quality matters, with quality banks outperforming lower-quality firms. Meanwhile, on the Tech side, the story is lower demand, which is affecting companies including Taiwan Semiconductors and Apple. This can be tied to the economic reopening—during COVID, people were working from home, watching a lot of TV, and playing video games, hence semiconductors and consumer tech products were in high demand. Now, that isn’t the case as much. The current trend is toward the AI space, and companies like Nvidia are moving up not because of their computer chips, but because of their AI potential. It’s also worth noting that inflation markups are coming off, which could decrease profit margins because expenses aren’t likely to come down fully —if your input costs are $10, and they were $8 previously, they probably aren’t going back down to $8. Quality companies have pricing power, so they can handle these kinds of pressures better than smaller counterparts. This further highlights why there will be a distinction between low quality and high quality companies moving forward.

Bottom Line: Whether in banks or tech, Quality matters.


When it comes to positioning, everything hinges on the strength of the consumer. It’s clear that the consumer is weakening, but only gradually. It’s the possibility of the consumer continuing to hold up relatively well, and the likelihood that we’ll avoid massive overnight job losses, that are the main reasons we’re not going underweight equities at this time. The recession has been pushed further out but is still likely to happen; at some point, we probably will reduce our risk. But when will be the right time to pull back our equity exposure? The triggers are likely to be earnings disappointments and job losses, which will tell us that a recession is near. Once we’re on the other side of that downturn and see some upside ahead, we’ll be ready to deploy our cash and jump back in.


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