The performance of the widely tracked US indices, such as the S&P 500 and NASDAQ 100 indices, has been negative since the start of 2022. As of April 30, 2022, they have fallen seven percent and 15 percent respectively.

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The recent underperformance has been attributed to all sorts of fears and disappointments, including high inflation, the Ukraine-Russia war, a hawkish Fed, COVID-19, slowing growth and companies missing earnings estimates .

Amid chaos and uncertainty, there may be some overlooked factors, such as:

1. People focusing on missed earnings estimates are actually missing forests for the trees

2. Slowing growth in the US real GDP may be seasonal

Companies missing earnings estimates

Only 55 percent of S&P 500 companies have reported actual results for the January-March period of 2022, as of April 29. Contrary to the negative sentiment, out of reported results, 80 percent of S&P 500 companies reported positive EPS surprise and 72 percent reported positive revenue surprise.

According to Factset, so far, companies have reported earnings growth of 7.1 percent in Q1 2022 vs estimates of 4.7 percent. At a company level, Amazon was the largest detractor to earnings growth for S&P 500 due to a large negative earnings surprise because of a one-time valuation loss adjustment.

Breaking down GDP numbers

The January-March 2022 real GDP in the US shrank 1.4 percent on a sequential basis as against estimates of 1.1 percent growth. This added to the recession fears, yet under the hood, it is interesting to see the real contributors to such change.

The GDP of the October-December period of 2021 was high due to rising inventory levels, which added five percentage points to the overall 6.9 percent sequential growth. Businesses seem to have invested in inventory buildup in anticipation of supply chain issues and strong demand on account of the holiday season.

Post after the first three months of 2022, the inventory level fell and contributed 0.84 percent to the overall declining GDP. The decline in inventory level may not be a cause of concern as it just suggests the consumption of the excess inventory of the last quarter further reflecting robust demand. Additionally, detracting government spending resulted in GDP decline by 0.48 percent. On the positive side, services contributed 1.86 percent, in line with expectations, as consumers started spending on restaurant, tourism, travel etc.

Now that we understood a few reasons why the US markets have underperformed, let us explore some strong fundamentals displayed by the world's largest economy.

· Rising interest rates may not necessarily punch a hole in consumer wallet

Current, interest payment outgo as a percentage of consumer income is at 9.3 percent, close to lowest level, implying that in a rising interest rate scenario (like today), consumers appear to be in better position to absorb relatively higher interest payments.

· Real wages are above pre-pandemic levels

· Consumer NPA (non-performing assets) ratio at historical lows

· US Corporate is not debt-laden

Conclusion

Equity markets irrespective of geography have always been volatile. As market experts speak, the current global macro events should not be ignored and one should take all investment-related decisions carefully.

Having a holistic view, keeping all the points mentioned above, becomes essential. Moreover, we should not forget the bigger picture and the benefits of having international equity as part of asset allocation.

--The author Mahavir Kaswa is Head of Research-Passive Funds at Motilal Oswal AMC. The views expressed in this article are his own.

First Published:May 25, 2022 4:21 PM IST