In a quarterly update, the fund said it had been monitoring three trends during 2022; a peak in interest rates, earnings estimates to come down and time.
“While two of these three factors have likely occurred, being interest rates have probably peaked and we are past the average duration of a bear market, the outlook for 2023 is more contingent on earnings estimates, which to date have remained stubbornly high.
“The fund remains conservatively positioned as we enter 2023 with the expectation that earnings estimates need to be revised (now likely in the first half of 2023).”
Earnings estimates for the S&P 500 had reduced slightly from $241 in June to $227 by the end of the year but Munro said this was small compared to falls of more than 20% in previous market drawdowns.
“We do expect demand should soften as the impact of rate rises starts to bite and for margins to come under pressure as wage inflation likely remains elevated at least initially. For Munro, this is the last shoe to drop, we do expect the Q4 earnings season to lead to downward earnings revisions as companies are more likely to guide conservatively for 2023.
“Our biggest concern here is that the market level today does not price in any possibility of a hard landing for growth and appears to be fully priced under a mild slowdown scenario, hence we are still not comfortable with the risk-reward entering a period where companies need to set full-year guidance.
“Should earnings estimates begin to reset over the first quarter then we will be much closer to removing any further macro overhangs from our outlook and stocks can go back to what they do best, which is following their earnings growth.”
