Inside Markets — Median Dot
Median Dot
February 27, 2023
A higher median dot coming out of the March 22 Fed meeting is the most apparent near-term risk for equity markets. The bond market has repriced for a more hawkish Fed scenario since the stronger January payroll data, while equities have only partially repriced. Higher bond yields aren’t just a theoretical headwind for equity valuations. Higher bond yields directly pressure corporate earnings via a higher cost of capital as floating rate loans reset over time. The fact that terminal rate expectations have risen to 5.4% from 4.85% is significant enough, but the forward curve has also priced out ~100bp of previously perceived year-end rate cuts. Consensus bottom-up estimates for 2023 SPX EPS currently sit at ~$220, but that number will begin to decline if bond markets are priced correctly. We’d expect more significant downside for 2023 Russell 2000 estimates.
Technical indicators continue to offer little near-term direction. The month-to-date pullback in the SPX looks like a broadening top, but the index has thus far maintained its uptrend from the October lows and above its 200-day moving average at 3940. Despite its simplicity, CTAs and other systematic funds use the 200-day moving average as a trading trigger. A break below 3940 could result in as much as ~$50B of selling volume and challenge next level support at 3880.
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