US Macro Strategy Weekly Report (05/22/23-05/26/23)
2023-05-23 00:00uSMART

Report by James Ooi/ uSMART Market Strategist 


Summary: This article explores the impact of economic recessions on the stock market. Analysts suggest that the recent robust performance of the Nasdaq 100 index has raised concerns regarding the sustainability of the technology sector. Furthermore, the current stock market continues to lack widespread upward momentum. Despite short-term bearish factors, there are still high-quality companies (such as Apple, Amazon, Visa, Tesla, Costco, and Microsoft) that warrant investors' attention. It is advisable for investors to gradually establish long-term positions and consider investing in ETF products to capture some market returns.


About James:

Over 13 years of experience in buy-side and sell-side of capital markets

Former Fund Manager of renowned asset management firm
Focus on fundamental analysis and macro-outlook for US & Singapore markets
SGX Academy trainer


This Week’s Market Outlook

This week's important economic data in the United States include April's New Home Sales, Manufacturing PMI, and Service PMI, which will be released on Tuesday. The FOMC Meeting Minutes, Unemployment Claims, and Preliminary GDP q/q will be released on Thursday. Additionally, the PCE and UoM Consumer Sentiment will be released on Friday. Furthermore, the market is also closely monitoring Treasury Secretary Yellen's speech on Wednesday and the latest updates regarding the debt ceiling.

As of last Friday, over 95% of the companies in the S&P 500 index had released their earnings reports, and 78% of them reported higher-than-expected EPS.

Generally, the growth rates of the M2 money supply have historically been largely positive (Figure 1), indicating an increasing amount of money in circulation. However, in March 2023, M2 growth year-on-year was negative at -4.05%. This marks the fourth consecutive month of negative year-on-year growth since December 2022. Negative growth in the M2 money supply signifies a contracting economy and suggests the presence of liquidity problems. Therefore, the Federal Reserve may not prefer the M2 money supply growth to remain negative for an extended period, as it could lead to a liquidity crunch. Consequently, the Fed might be inclined to initiate interest rate cuts in the latter half of 2023 as a measure to prevent a liquidity problem.

Figure 1: M2 Money Supply YoY Growth vs Fed Fund Rate

Source: Fred, 12 May 2023


According to Bank of America's research data spanning from 1927 to March 2023, it has been observed that in eight out of the last ten recessions, the S&P 500 index had suffered declines of over 20% from one year beforehand. Additionally, there have been a total of 15 recessions since 1927, and in each case, the drawdowns experienced one year before the recession were greater than those witnessed during the actual recessions. Thus, the drawdown observed in October of last year could potentially be the most severe if there is an imminent recession.

Figure 2: S&P max drawdown during recession and from 1-year pre-recession

Source: Market Watch, BofA


Typically, the NASDAQ-100 tends to move in line with the inverted US 10-year Real Yield(Figure 3). However, the recent outperformance of the NASDAQ-100 has caused a divergence between the two, raising concerns about the sustainability of the tech rally. This is because bond markets usually lead equity markets, and the pessimism among bond investors indicates that the tech rally may not stay higher for longer.

Figure 3: Nasdaq-100 vs 10-year Real Yield

Source: uSMART, Tradingview, 23 May 2023


Thus far this year, the S&P 500 has provided a return of +10.4%, while the S&P 500 Equal Weight has returned 1.9% (Figure 4). The outperformance of the S&P 500 indicates that the equity market still lacks breadth.

Figure 4: S&P 500 vs S&P 500 Equal Weighted

Source: uSMART, Tradingview, 23 May 2023



  • There have been noticeably fewer discussions about recession in recent quarterly earnings calls, indicating that corporations have become less concerned about the economic outlook.
  • Additionally, more analysts are beginning to upgrade their year-end target. However, the S&P 500 only experiences a modest 0.56% increase in May.
  • Both bullish and bearish perspectives present compelling arguments regarding the equity market. Bulls emphasize the gradual improvement in economic data and stronger-than-anticipated corporate earnings, whereas bears contend that the equity market lacks breadth and that expectations for rate cuts are unrealistic.
  • I remain short term bearish as both the S&P 500 and Nasdaq-100 have recorded year-to-date gains primarily driven by PE expansion.
  • Currently, there are several high-quality companies, such as Apple, Amazon, Visa, Tesla, Costco, and Microsoft, that continue to demonstrate strong long-term EPS growth potential. Investors may consider gradually establishing long-term positions in these companies. Additionally, investors can also explore ETFs like SPY, QQQ, and SUSA to capture some market returns.


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