Market Analysis
November 21, 2022 | Market news

At a glance

Despite higher interest rates and a soft housing market, consumer spending remains solid. The upcoming holiday spending season is an important indication for earnings prospects.

U.S. Bank Global Health Check

The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.

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Source: U.S. Bank Asset Management Group, November 18, 2022.

Number of the week:


The increase in earnings for S&P 500 companies in the third quarter compared to a year ago.

Term of the week:

Earnings reporting period – Public companies are required to file quarterly earnings reports that include revenue, profit, operational expenses and cash flow. The report also generally informs investors of challenges and opportunities from the viewpoint of management (guidance).

Quote of the week:

“Consumer spending remains strong, with retail sales 1.3% above analysts’ expectations in October. While some strength came from higher gasoline prices, the Census Bureau also reported solid increases at restaurants, grocery stores, auto dealerships and online shopping. In contrast, the goods sector remains weak, including electronics, appliances, sporting goods and department stores.”

 Robert Haworth, Senior Vice President, Senior Investment Strategy Director, U.S. Bank

Global economy

Quick take: The U.S. housing market is taking the immediate brunt of Federal Reserve (Fed) interest rate increases. Consumer spending remains solid, especially for experiences. China’s slowing economy continues in the face of ongoing lockdowns to limit coronavirus spread.

Our view: Our U.S. Health Check highlights positive but below-trend economic activity and decelerating momentum as the Fed tightens monetary policy to combat elevated inflation. Outside the U.S., our foreign scores are below median and slowing.

  • Key points: hides details

    • Consumer spending remains strong, with retail sales 1.3% above analysts’ expectations in October. While some strength came from higher gasoline prices, the Census Bureau also reported solid increases at restaurants, grocery stores, auto dealerships and online shopping. In contrast, the goods sector remains weak, including electronics, appliances, sporting goods and department stores.
    • Still-high interest rates remain a headwind for the housing market. November home builder sentiment, as measured by the National Association of Home Builders, fell to its lowest level since June 2012. October saw declines in the pace of housing starts and building permits, and existing home sales declined for the ninth consecutive month. With 30-year mortgage rates near 7%, housing is less affordable, hurting potential new home buyers and reducing listings from potential buyers looking to “trade-up.”
    • China’s economy continues to slow in the face of continuing lockdowns to combat the spread of COVID-19. Retail sales dropped 0.5% in October compared to the previous year, with consumers sheltered against rising infections. Fixed asset investments and industrial output both decelerated during the same period, slowing to growth of 5.8% and 5.0%, respectively.

Equity markets

Quick take: U.S. equities begin this Thanksgiving-shortened week with investors shifting attention toward holiday sales as the third quarter reporting period draws to a close.

Our view: Inflation, interest rates and earnings are key to equity returns. At present, inflation continues to be elevated, interest rates are rising and consensus earnings projections are trending lower.

  • Key points: hides details

    • Year-to-date performance remains lackluster, but quarter-to-date performance is superb. For the year, as of Friday’s close, the S&P 500 and technology-oriented NASDAQ Composite are down 17.0% and 28.4%, respectively, with 10 of 11 sectors showing losses. Conversely, for the quarter, the S&P 500 (10.4%) and NASDAQ (5.9%) are both up, with 10 of 11 sectors in positive territory and five sectors gaining 16% or more. The recent favorable performance may be attributed to expectations that slowing economic activity may spur the Fed to moderate its pace of interest rate hikes.
    • Third quarter corporate results are trending modestly above expectations. As of Friday’s close, with 95% of S&P 500 companies having released results, sales and earnings are up 11.6% and 3.2%, respectively. Also worthy of note, earnings breadth is lacking, with five of 11 sectors recording negative year-over-year growth.
    • Projected earnings for 2023 remain largely unchanged but have a downward bias. Consensus earnings estimates for 2022 and 2023 are currently at roughly $221 and $232 per share, respectively, according to Bloomberg, FactSet and S&P Capital IQ. Holiday sales will undoubtedly impact expectations for both 2022 and 2023. At current prices, the S&P 500 trades at roughly 18.0 and 17.1 times respective 2022 and 2023 estimates.
    • Holiday sales are off to a slow start as consumers await promotional deals, and retail inventories are elevated. While reports from select retail companies reflect progress on inventories, improved supply constraints result in early merchandise arrivals, adding to stock just as consumers are delaying shopping in anticipation of late-season promotions. With consumer sentiment showing increasing signs of stress, to be determined is the extent to which shoppers are in “trade down” mode, switching from brands to private labels while emphasizing essentials versus discretionary items. Companies are expected to discount merchandise to avoid beginning the year with excess inventory while maintaining operating flexibility.

Bond markets

Quick take: Short-term Treasury yields rose while longer-term Treasury yields fell, reflecting expectations that tighter monetary policy in the near term will slow growth and inflation in the long run. Fed officials acknowledged the improvement of recent inflation data last week but reiterated their intention to raise rates into next year. Signs of peaking inflation boosted investor sentiment and aided corporate and municipal bonds outperformance over Treasuries last week.

Our view: We prefer defensively positioning portfolios through higher-than-normal exposure to high-quality bonds, which offer attractive income and typically perform better than equities when growth and inflation slow. Mortgage bonds not backed by the government have favorable yields, and strong home price gains in recent years support collateral values.

  • Key points: hides details

    • Investors expect the Fed to raise interest rates by 0.5% in December, but discourse on the appropriate peak rate continues. Recent comments from Fed officials indicate a slower hiking pace would give the Fed more time to observe the economic impact of policy tightening. Officials’ viewpoints on the appropriate peak rate appear mixed, however. St. Louis Fed President James Bullard said he anticipates hiking to 5% to 5.25% at a minimum and noted rates as high as 7% may be necessary. In contrast, Fed Vice Chair Lael Brainard said a peak between 4.75% and 5.25% seems reasonable. Treasury yields incorporate expectations for the rate to peak around 5.00% in mid-2023 with cuts later in year.
    • Slowing growth and inflation expectations caused near-record Treasury yield curve inversions last week, in which short-term yields exceed long-term yields. Long-term Treasury bond yields can fall below short-term yields during periods of Fed rate hikes, slowing growth and slowing inflation. Currently, the 10-year Treasury bond yield is lower than all shorter-term yields, apart from those with just one month to maturity. We prefer slightly higher-than-normal allocations to higher-quality bonds in anticipation of tighter monetary policy and slower growth and inflation ahead, headwinds for riskier assets.

Real assets

Quick take: Most real assets trailed the S&P 500 last week, with commodities hurt by a large decline in crude oil prices and Real Estate giving back some recent strong gains. Infrastructure was the lone outperformer, helped by the Utilities sector, one of three S&P 500 sectors positive for the week.

Our view: We continue to see value in real assets’ defensive sectors. Infrastructure should outperform on a relative basis over a six -to 12-month horizon with investors favoring tangible assets with stable cash flows as we move past peak earnings growth. Additionally, defensive assets should continue to be favored in a generally “risk-off” market regime.

  • Key points: hides details

    • Real Estate trailed the S&P 500 last week, with the market consolidating from recent rallies. Residential properties and data centers were the top-performing sectors while offices and cell towers lagged.
    • Infrastructure beat the S&P 500 0.5% last week. Performance was led by utilities and toll roads, with each beating the S&P 500 by 1.5%. Midstream energy infrastructure also helped by remaining flat for the week even as crude oil prices fell dramatically.
    • Crude oil prices fell 10% even though domestic inventories declined. Concerns about China’s re-opening and increases in domestic refined product inventories pressured prices. We still see the crude market as undersupplied, which should be supportive for prices over a longer time horizon, but acknowledge downside exists if the economy continues to slow.

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The NASDAQ Composite Index is a market-capitalization weighted average of roughly 5,000 stocks that are electronically traded in the NASDAQ market.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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