1. Debt Ceiling
The Republican-controlled U.S. House of Representatives recently passed a bill to raise the debt ceiling. We believe the measure—which would also eliminate several Biden administration programs—has essentially no chance of becoming law. The deadline for action on the debt ceiling could come as early as June according to Treasury Secretary Janet Yellen, as April tax receipts are far below last year’s totals. We are hopeful for a resolution but believe the summer period will likely bring increased market volatility as Congress attempts to negotiate fiscal policy.
2. Commercial Real Estate
Roughly $400 billion of commercial real estate debt will come due this year. This comes at a time of anemic demand for office space as companies continue to seek out a balance between remote and in-person work. That ongoing effort, combined with significantly higher interest rates, creates an uncertain path ahead that varies greatly city to city. Vornado Realty Trust’s CEO recently commented, “We are now approaching the eye of the economic storm, and I expect it will get even worse.” One example: 350 California Street in San Francisco was valued at $300 million in 2019. The building is now for sale, and is expected to sell for approximately $60 million.
3. Earnings
With over 50% of companies having reported earnings, S&P 500 earnings per share (EPS) are on pace to decline -4.2% year over year; better than the consensus forecast of a -6.7% decline. While the first quarter bar was set rather low, we are encouraged to see EPS withstand significantly higher borrowing rates (regional banks excluded).
Earnings beats have bounced back in Q1 2023
Historical S&P 500 quarterly earnings beat rate and thus far for Q1 2023 (percentage point beat above the consensus forecast)
Source - RBC Wealth Management, national research correspondent, Refinitiv I/B/E/S, FactSet; data as of 4/27/23. Q1 2023 data is preliminary and likely to change as more companies report results.
Something to remember about recessions:
It’s worth noting that a recession does not always have to be catastrophic for the equity markets (in 1990 the S&P was down -6%).