As we have previously explained, US households are, on average, in (too) good financial shape and consumers have kept spending, even as inflation rises. Plus, the labour market is still very tight, with approximately two job openings for every unemployed worker currently. Workers are demanding higher wages. Unemployment rate, at 3.7%, has barely budged and is still near 50-year lows. This is partly attributable to low labour participation rate, currently 62.4%, which remains below the pre-pandemic level of 63.4% in February 2020.
We sold some stocks in the Global Portfolio last week (before the sharp selldown in the US markets on Tuesday), primarily to raise our cash holdings. Following the disposals, cash now accounts for roughly 43% of total portfolio value. To be sure, the US and global stock markets have seen more stability in recent weeks, recouping some losses from the steep selloff in 2Q2022. However, we are cautious that markets may still have more downside risks from hereon, including from weaker corporate earnings.
Although earnings expectations in the US have seen some downward revisions following the latest reporting season for 2Q, the 5.5% reduction for 3Q estimates from end—June is relatively modest. Furthermore, average net margin for S&P 500 companies, though slightly pared down, remains high at 12.3%, in part, because macroeconomic conditions in the US remain quite strong. However, the probability of a global recession is rising, especially in Europe, which is facing an energy crisis. Eventually, weaker global growth will feedback negatively into the US economy and corporate earnings and margins (according to FactSet, 40% of S&P 500 revenue are derived from overseas).
