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Astoria's Q2 Investment Outlook: economic contraction, risks elevated, but recession risks overblown

We are skeptical about Q1’s rally and whether or not it will continue. Why?

  1. Q1 was more liquidity driven as opposed to fundamental.

  2. China’s reopening released trillions of dollars in pent-up demand into the global economy.

  3. Mean reversion was heavy at play as 2022’s biggest losers were up the most in 2023.

  4. Japan’s yield curve control also led to additional liquidity.

  5. Market breadth was poor as only a handful of stocks drove the S&P 500’s return in Q1.

  6. Given many indicators remain in contractionary territory and forecasts for the upcoming earnings season are weak, it’s hard to get excited about buying the S&P 500 Index at 18x earnings.

Once the yield curve un-inverts further and leading indicators inflect higher, we’d aim to rerisk towards higher beta/risk factors. Remember, we’re still in a bear market, and bull markets don’t start with the S&P 500 Index trading at such expensive valuations.

Moreover, three key points:

  1. Market internals are awful; market breadth is the weakest in nearly 20 years (this is due to concentration of tech stocks + flight to quality in Q1)

  2. Markets are entering peak earnings season in the next few weeks – this will dictate trading for April/May

  3. EPS estimates have been falling steadily, earnings revisions are in negative territory, and actual EPS have fallen short of forecasts – none of these are constructive in our view

So what should advisors do with this info?

Read our full Q2 Outlook Report Here


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