Market

INVESTMENT MANAGEMENT Strategy Report

March 2024

Zacks Investment Management

Power Your Portfolio with Research

IN THIS GUIDE:

Is New York Community Bank a ‘Canary in the Coal Mine’? 3

How Rate Cut Delays, Rising Bond Yields, and Quantitative Tightening (QT)
are Impacting the Stock Market 4

Previewing Q1 2024 Earnings Season 6

Bottom Line for Investors 9

 M A R K E T S T R AT E G Y R E P O R T

What to Expect from This Report

About a year following last year’s regional bank crisis, many investors are experiencing déjà vu. In the first
two months of 2024, yet another mid-sized lender is experiencing fresh troubles. New York Community Bank
(NYCB) declined by over -50% in January and February, which is meaningful considering that it purchased
Signature Bank New York last year as part of its rescue plan. We’ll take a closer look at NYCB’s current
troubles and consider whether more trouble could be brewing for the sector.

Elsewhere in the capital markets, we would note that February featured rising yields on 10-year U.S.
Treasury bonds, falling expectations for the timing of Fed rate cuts, and a shrinking Federal Reserve balance
sheet (quantitative tightening, or QT). Yet stocks went up. We re-examine the relationship between bond
yields, Fed actions, and stocks, debunking previously held beliefs in the process.

Finally, we’ll offer a preview of Q1 2024 earnings season.

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Is New York Community Bank a ‘Canary in the Coal Mine’?

Investors are getting concerned about regional banks, again.

In the latest chapter of the regional banking crisis that took hold over a year ago, New York Community Bank
(NYCB) has been under pressure in 2024 as investors grow increasingly concerned over its commercial real
estate exposure—particularly rent-stabilized multi-family buildings in the New York City area.

It appears that NYCB has not stockpiled sufficient reserves against those exposures, and its 2023 acquisition
of Signature Bank New York has also added to its overall risk profile. In response to growing concerns, the
bank cut its dividend, increased its loan loss provisions, and in early March, raised $1 billion in new equity.1

Zooming out a bit more on NYCB’s current issue, one key change the bank has undergone recently is a
swelling in size. NYCB’s current standing has many contrasts to the warning signs that Silicon Valley Bank
(SVB) had last year, which featured big potential losses on their bond portfolio and sizable amounts of
uninsured deposits. By contrast, NYCB has nearly 75% of its deposits insured, and as of Q3 2023, it had no
“held-to-maturity” securities, which in SVB’s case were a huge source of interest rate risk and unrealized
losses.

But NYCB has gotten a lot bigger. Its assets jumped from $90 billion at the end of 2022 to $110 billion in its
latest regulatory filing, which makes it subject to Federal Reserve stress tests. The latest stress test scenario
assumes a 40% decline in commercial real estate prices, which for NYCB appeared problematic given the
relative size of its commercial real estate exposure. NYCB also self-reported that “management identified
material weaknesses in the company’s internal controls related to internal loan review, resulting from
ineffective oversight, risk assessment, and monitoring activities.” Perhaps not surprisingly, this confluence
of events spooked markets.

The next few weeks will be critical for NYCB, but the larger takeaway from this story is arguably that
weakness in commercial real estate could continue creating pockets of stress in the financial and real estate
sectors. Investors should keep a close eye.

1
Wall Street Journal. March 5, 2024. https://www.wsj.com/finance/banking/the-problem-isnt-big-banksits-banks-getting-bigger-07fe2dbd

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How Rate Cut Delays, Rising Bond Yields, and Quantitative Tightening (QT)
are Impacting the Stock Market
The “Don’t Fight the Fed” mantra is one of the most popular idioms in equity market investing. Investors
would point to the last decade of Fed actions and market returns as evidence that the relationship between
the two is not only meaningful but also inextricable.

In the years following the 2008 Global Financial Crisis, the Fed lowered rates to the zero bound and began
buying long-term Treasurys and mortgage-backed securities in massive quantities, in a concerted effort to
pressure interest rates lower across the yield curve. It worked, and the thinking goes that investors were
'forced' into risk assets as a result--since yield was diminished in fixed-income markets.

Low yields arguably helped the stock market significantly during this period. But the suggestion that Fed
actions were the only reason stocks did well in the 2010s and after 2020 is flawed, in our view. If this theory
were true, it would mean quantitative tightening (QT) and rising interest rates would in turn be bearish for
stocks, but that has not been the case at all recently.

The Fed’s balance sheet peaked in April 2022 and has fallen by nearly $1.5 trillion since then. In that time,
bond yields have also marched higher, with the 10-year U.S. Treasury bond moving from approximately
2.30% (April 2022) to 4.25% (February 2024).2 So, taken together, we have nearly two years’ worth of
1

quantitative tightening on the books, with bond yields nearly doubling in that time. This prolonged
tightening period should have been treacherous for stocks. But it wasn’t.

We know that 2022 featured a bear market, but it ended in October of that year while QT, aggressive rate
hikes, and rising bond yields were ongoing. As seen in the chart below (pay particular attention to the green
box), the Fed’s balance sheet (blue line) has been progressively shrinking – save for a brief uptick during
regional bank stress – while the stock market (red line) has been rallying strongly.

Source: Federal Reserve Bank of St. Louis 3

2
U.S. Department of Treasury. 2024. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024
3
Fred Economic Data. March 7, 2024. https://fred.stlouisfed.org/series/WALCL

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In 2024, bond yields have been moving modestly higher, which many would assume should factor as a
negative for stocks. But stocks have managed to hit new all-time highs in the new year. The point to make
once again is that falling bond yields and QE were not solely responsible for stocks’ strong gains over the
past 15 years or so, just like rising bond yields and QT should not prevent stocks from reaching new all-time
highs.

The argument that the Fed and bond yields matter immensely to stock market performance is missing
something glaring: the role of corporate earnings and economic growth. Aggregate S&P 500 earnings-per-
share grew steadily from 2009 to 2015, contracted slightly, and then trended sharply higher up until the
end of 2019. Aggregate EPS for S&P 500 companies more than doubled in this period, with profit margins
reaching their highest point in decades by 2022. Zooming out even further, we know that year-over-year
operating EPS growth averaged 7.1% from 2001 to 202243, which is almost perfectly in line with the S&P 500’s
7.01% annualized return over that same period.54

Previewing Q1 2024 Earnings Season

The U.S. economy continues to show signs of ongoing strength, with strong hiring and modest but still solidly positive
wage growth. Corporate earnings are expected to be modestly positive, too.65

Zacks expects S&P 500 earnings to be up +2.4% from the same period last year on +3.5% higher revenues, following
the +6.1% earnings growth on +2.6% revenue gains in the preceding period. The chart below shows current earnings
and revenue growth expectations for Q1 2024, which is seen building on positive momentum from Q3 and Q4 2023
and could give way to acceleration as 2024 progresses.

Quarterly Earnings and Revenue Growth Rate (YoY)

15
15%
12.6%

10
10% 8.9%

7.1% 6.6%
6.1%
4.5% 4.9%
5%
5 4.4% 3.8%
3.5%

0 1.0%
2.1% 2.6% 2.4%

0%

-2.3%

-5
-5%
EARNINGS
-6.7%
REVENUE

-10
-10%
1Q23E 2Q23E 3Q23E 4Q23E 1Q24E 2Q24E 3Q24E 4Q24E

-15
Source: Zacks Investment Research, Inc.

4
J.P. Morgan. Guide to the Markets. 2024. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/?gclid=Cj0KCQjwmICoBhDxARIsABXkXlK
Ewzu1pOK4ldrG0WzcPVDn1jeam7dSUKFu_7tFO9SbwNAwzFwb9aMaArH1EALw_wcB&gclsrc=aw.d
5
Moneychimp. 2024. http://www.moneychimp.com/features/market_cagr.htm
6
Zacks.com. March 8, 2024. https://www.zacks.com/commentary/2238312/previewing-the-2024-q1-earnings-season Market Strategy Report 5
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Since the start of Q1, estimates have come down for 10 of the 16 Zacks sectors, with the biggest cuts to estimates
for the Energy, Autos, Basic Materials, and Transportation sectors. Estimates have modestly increased over this
period for 6 of the 16 Zacks sectors, with the Retail, Consumer Discretionary, and Tech sectors enjoying notable
positive revisions. Taken together, while the revisions trend has been negative, the magnitude of cuts to Q1 estimates
compares favorably to what we had seen in the comparable period for the preceding quarter (2023 Q4). The chart
below shows how Q1 earnings growth expectations have evolved since the quarter got underway.

Evolution of 2024 Q4 Earnings Growth Estimates

5.9%
6.0%
6.00%

4.7%
4.6%
4.4%

4.0%
4.00%

3.5%

2.7%
2.4%

2.0%
2.00%

0.0%
0.00%
12/17 1/10 1/17 1/24 1/31 2/1 3/8
Source: Zacks Investment Research, Inc.

One of the key drivers of stock market returns in recent weeks – and also a notable driver of earnings growth over the
same period – has been the Technology sector. The Tech sector is now firmly back in the growth mode, and the trend
is expected to -2.00%
continue going forward. For Q1 2024, Tech sector earnings are expected to increase +18.9% from the
same period last year on +7.9% higher revenues. This would follow the sector’s +27.4% higher earnings in Q4 2023 on
+8.5% higher revenues. For investors wondering if Tech stock outperformance has been unjustified or indicates a sign
of a bubble, this data should assuage those concerns.

The sector experienced a period of post-COVID adjustment in 2022 and the first half of 2023, during which time
it became a drag on the aggregate growth picture. But Tech isn’t just any other sector; it is the biggest earnings
contributor to the S&P 500 index, and it is currently expected to bring in 28.6% of the index’s total earnings over the
coming four-quarter period, with the second and third biggest contributors being Finance and Medical, at 17.8% and
12.5%, respectively.

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This means that the Tech sector’s growth profile has a very big impact on the aggregate picture, both negatively and
positively. The Tech sector dragged down the aggregate growth picture in 2022 and the first half of 2023, but it now
appears ready to resume its historically positive growth role. You can see this growth profile in the chart below, which
also shows that the sector’s 2023 Q4 earnings tally of $158.2 billion was a new all-time quarterly record.

Technology Sector's Quarterly Earnings (Billion $)

185
185.00%

176

165
165.00%
158
154
149
145
145.00% 141 141
138
135
129 131
124 124
125
125.00%
119 119 121
115 114
112
105
105.00%

85
85.00%

65
65.00%
4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24E 3Q24E 4Q24E 1Q25E
Source: Zacks Investment Research, Inc.

With Tech as a leader, total 2024 S&P 500 earnings are expected to be up +9.5% on +4.7% revenue growth in 2024, as
seen in the chart below.

Annual Earnings and Revenue Growth Rate - S&P 500

55%
55 52.3%

45%
45

35%
35

25%
25
16.9%
13.1%
15% 13.0%
11.6%
9.5%
6.1% 4.7% 5.9% 5.5%
15
5%
5 1.5%

-5%
-5
-2.3%
EARNINGS
REVENUE

-15%
-15
2021 2022 2023 2024E 2025E 2026E
Source: Zacks Investment Research, Inc.

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Bottom Line for Investors

The NYCB story is one worth tracking closely, and investors should look for other signs of commercial real
estate-driven duress particularly for mid-sized banks. The upshot to this issue, however, is that markets have
had a long time to price this risk, and commercial real estate troubles have been known for some time. NYCB
appears to be stabilized for now, but on the flip side, running into more trouble may not necessarily imply
broader systemic issues for the financial sector. Large banks are still well-capitalized.

The stock market has done well despite quantitative tightening and a pushed-back timeline on rate cuts from
the Fed, and we would credit strong economic growth and positive corporate earnings reports as the reason
for the ‘disconnect.’ With earnings expected to increase 9.5% for the full year of 2024, there’s a good argument
that the stock market does not need more-than-expected rate cuts or materially lower interest rates to do
well. The economy remains in fine shape.

D I S CL A IME R

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent
Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of
earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a
recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the
services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the
information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any
investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets
identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views
or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions.
Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required
to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are
subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy
discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment
Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed
responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect
to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions
are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high
degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by
Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be
materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell.
The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index.
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The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types
of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as
limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds
(ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the
individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the
New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly
invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell
2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the
benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is
designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The Morningstar Universes used for comparative analysis are constructed by Morningstar (median performance) and data is provided to Zacks by
Zephyr Style Advisor. The percentile ranking for each Zacks Strategy is based on the gross comparison for Zacks Strategies vs. the indicated universe
rounded up to the nearest whole percentile. Other managers included in universe by Morningstar may exhibit style drift when compared to Zacks
Investment Management portfolio. Neither Zacks Investment Management nor Zacks Investment Research has any affiliation with Morningstar.
Neither Zacks Investment Management nor Zacks Investment Research had any influence of the process Morningstar used to determine this ranking.
These ratings were awarded by Morningstar on 1/1/2024 in respect of the period from strategy inception to 12/31/2023 (Inception Dates: All Cap-
2/1/1995, Focus Growth- 2/1/2003, Dividend- 4/1/2004, Mid and Small Cap- 5/1/2009). We do not compensate Morningstar to obtain this rating.
However, we pay compensation to Morningstar to use their logo in connection with advertising this rating.
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* These ratings were awarded by Morningstar on 1/1/2024 in respect of the period from strategy inception to 12/31/2023 (Inception Dates: All
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