These 11 stocks can lead your portfolio's rebound from the S&P 500 'earnings recession' and a market bottom next year

These 11 stocks can lead your portfolio’s rebound from the S&P 500 ‘earnings recession’ and a market bottom next year

It may surprise you: Wall Street analysts expect S&P 500 earnings increase 8% in 2023, despite all the buzz about a possible recession as the Federal Reserve tightens monetary policy to stifle inflation.

Ken Laudan, portfolio manager at Kornitzer Capital Management in Mission, Kansas, isn’t buying it. He expects an “earnings recession” for the S&P 500 SPX
— i.e. a drop in profits of approximately 10%. But he also expects the decline to set a floor for the stock market.

Laudan’s predictions for the S&P 500 ‘earnings recession’ and trough

Laudan, who manages the $83 million Buffalo Large Cap Fund BUFEX
and co-manages the $905 million Buffalo Discovery Fund BUFTX,
said in an interview: “It’s not uncommon to see a 20% hit [to earnings] in a modest recession. Margins have skyrocketed.

The consensus among analysts polled by FactSet is that the S&P 500’s overall weighted earnings are $238.23 per share in 2023, which would represent an increase of 8% from the current 2022 EPS estimate of 220. $.63.

Laudan said his base case for 2023 calls for earnings of around $195 to $200 per share and that this decline in earnings (around 9% to 12% from the current consensus estimate for 2022) would be “coupled with any economic downturn.”

He expects Wall Street estimates to drop and said that “once Street estimates hit $205 or $210, I think stocks will take off.”

He went further saying that “things get really interesting at 3200 or 3300 on the S&P”. The S&P 500 closed at 3583.07 on Oct. 14, down 24.8% for 2022, excluding dividends.

Laudan said the Buffalo Large Cap Fund was around 7% in cash as it kept some powder dry for stock purchases at lower prices, adding that it had been “pretty defensive” since October 2021 and continued to focus on “stable dividend-paying companies with strong balance sheets.

Leaders for the stock market recovery

After the market bottoms, Laudan expects a rally in equities to begin next year as “valuations will decline and react faster than earnings.”

He expects “long-lived tech growth stocks” to lead the rally as “they got hit first.” When asked if Nvidia Corp. NVDA
and Advanced Micro Devices Inc. AMD
were good examples, in light of the widespread decline in semiconductor stocks and because both are held by the Buffalo Large Cap Fund, Laudan said: “They took us down and they will rebound first. “

Laudan said his “largest technology holding” is ASML Holding NV ASML,
which provides equipment and systems used to manufacture computer chips.

Among the biggest tech-focused companies, the Buffalo Large Cap fund also owns shares of Apple Inc. AAPL,
Microsoft Corp. MSFT,
Amazon.com Inc. AMZN
and Alphabet Inc. GOOG

GOOGL.

Laudan also said he had been “overweight” in UnitedHealth Group Inc. UNH,
Danaher Corp. HRD
and Linde PLC LIN
recently and had benefited from the decline of Adobe Inc.’s ADBE.
price following the announcement of its $20 billion acquisition of Figma, picking up more shares.

Summarize declines

To illustrate how brutal the year has been for semiconductor stocks, the iShares Semiconductor SOXX ETF,
which tracks the PHLX Semiconductor Index SOX
of the 30 chipmakers and related equipment manufacturers listed in the United States, has fallen 44% this year. Again, SOXX had risen 38% over the past three years and 81% over five years, underscoring the importance of long-term thinking for stock market investors, even during this dire bear market for this particular tech space. .

Here’s a summary of stock price movements (again, excluding dividends) and forward 2022 price-to-earnings valuations as of October 14 for each stock mentioned in this article. The actions are sorted in alphabetical order:

Company

Teleprinter

Price change 2022

PER before

Forward PER as of December 31, 2021

Apple Inc.

AAPL

-22%

22.2

30.2

Adobe Inc.

ADBE

-49%

19.4

40.5

Amazon.com Inc.

AMZN

-36%

62.1

64.9

Advanced Micro Devices Inc.

AMD

-61%

14.7

43.1

ASML Holding SA ADR

ASML

-52%

22.7

41.2

Danaher Corp.

HRD

-23%

24.3

32.1

Alphabet Inc. Class C

GOOG

-33%

17.5

25.3

Linde PLC

LINEN

-21%

22.2

29.6

Microsoft Corp.

MSFT

-32%

22.5

34.0

Nvidia Corp.

NVDA

-62%

28.9

58.0

UnitedHealth Group Inc.

A H

2%

21.5

23.2

Source: FactSet

You can click on the tickers to learn more about each company. Click here for Tomi Kilgore’s in-depth guide to the wealth of information available for free on the MarketWatch quotes page.

The forward P/E ratio for the S&P 500 fell to 16.9 at the October 14 close from 24.5 at the end of 2021, while the forward P/E ratio for SOXX rose from 27.1 at 13.2.

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