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These 11 stocks could lead the portfolio’s decline after the S&P 500 ‘earnings recession’ and a market bottom next year




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

Ken Laudan, a portfolio manager at Kornitzer Capital Management in Mission, Kan., doesn’t buy it. He expects an “earnings recession” for the S&P 500 SPX,
+2.62%
— that is, a decrease in profit of around 10%. But he also expects that the decline will set up a bottom for the stock market.

Laudan̵[ads1]7;s Predictions for S&P 500 ‘Earnings Recession’ and Bottom

Laudan, who manages the $83 million Buffalo Large Cap Fund BUFEX,
-2.86%
and co-manages the $905 million Buffalo Discovery Fund BUFTX,
-2.82%,
said during an interview: “It’s not unusual to see a 20% hit [to earnings] in a modest recession. Margins have peaked.”

The consensus among analysts polled by FactSet is for weighted total earnings for the S&P 500 to total $238.23 per share in 2023, which would be an 8% increase from the current 2022 EPS estimate of $220.63.

Laudan said his starting point for 2023 is earnings of around $195 to $200 per share, and that the decline in earnings (about 9% to 12% from the current consensus estimate for 2022) should be “combined with an economic recession of some kind.”

He expects Wall Street estimates to fall, saying that “once the Street estimates get to $205 or $210, I think the stock will take off.”

He went on to say “things get very interesting at 3200 or 3300 on the S&P.” The S&P 500 closed at 3,583.07 on Oct. 14, down 24.8% for 2022, excluding dividends.

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

Leaders of the stock market’s rise

After the market has bottomed, Laudan expects a recovery for stocks to begin next year, as “valuations will reduce and react faster than earnings will.”

He expects “long-term technology growth stocks” to lead the rally, because “they got hit first.” When asked about Nvidia Corp. NVDA,
+5.81%
and Advanced Micro Devices Inc. AMD,
+3.58%
were good examples, given the broad decline for semiconductor stocks and because both are held by the Buffalo Large Cap Fund, Laudan said: “They led us down and they will bounce first.”

Laudan said his “biggest technology holding” is ASML Holding NV ASML,
+3.56%,
which supplies equipment and systems used to manufacture computer chips.

Among the largest technology-oriented companies, the Buffalo Large Cap fund also holds shares in Apple Inc. AAPL,
+3.04%,
Microsoft Corp. MSFT,
+3.84%,
Amazon.com Inc. AMZN,
+6.20%
and Alphabet Inc. GOOG,
+3.97%

GOOGLE,
+3.79%.

Laudan also said he had been “overweight” in UnitedHealth Group Inc. UNH,
+1.26%,
Danaher Corp. DHR,
+2.54%
and Linde PLC LIN,
+2.26%
recently and had taken advantage of the decline in Adobe Inc.’s ADBE,
+1.96%
price following the announcement of the $20 billion acquisition of Figma, by scooping up more shares.

Summarizing the declines

To illustrate what a brutal year it has been for semiconductor stocks, the iShares Semiconductor ETF SOXX,
+1.88%,
which tracks the PHLX Semiconductor Index SOX,
+2.12%
of 30 US chipmakers and related equipment makers, has fallen 44% this year. Then again, SOXX was up 38% over the past three years and 81% in five years, underscoring the importance of long-term thinking for equity investors, even during this terrible bear market for this particular tech space.

Here’s a summary of share price changes (again, excluding dividends) and forward price-to-forward earnings estimates during 2022 through October 14 for each stock mentioned in this article. The shares are sorted alphabetically:

Company

Ticker

Price change in 2022

Forward P/E

Forward P/E as of 31 December 2021

Apple Inc.

AAPL,
+3.04%

-22%

22.2

30.2

Adobe Inc.

ADBE,
+1.96%

-49%

19.4

40.5

Amazon.com Inc.

AMZN,
+6.20%

-36%

62.1

64.9

Advanced Micro Devices Inc.

AMD,
+3.58%

-61%

14.7

43.1

ASML Holding NV ADR

ASML,
+3.56%

-52%

22.7

41.2

Danaher Corp.

DHR,
+2.54%

-23%

24.3

32.1

Alphabet Inc. Class C

GOOG,
+3.97%

-33%

17.5

25.3

Linde PLC

LINE,
+2.26%

-21%

22.2

29.6

Microsoft Corp.

MSFT,
+3.84%

-32%

22.5

34.0

Nvidia Corp.

NVDA,
+5.81%

-62%

28.9

58.0

UnitedHealth Group Inc.

UNH,
+1.26%

2%

21.5

23.2

Source: FactSet

You can click on the tickers for more about each company. Click here for Tomi Kilgore’s detailed 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 close on October 14 from 24.5 at the end of 2021, while the forward P/E for the SOXX fell to 13.2 from 27.1.

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