Buckhead Capital – Quarterly Commentary for Second Quarter 2023


  • Led by a few mega-cap growth stocks, the S&P 500 returned 8.7% in the second quarter.
  • The Information Technology sector returned 17% and was the largest contributor to the S&P 500.
  • Value stocks and small-cap stocks under-performed growth and large-cap stocks.
  • The broad-market Bloomberg Aggregate bond index returned -0.8% for the quarter as rates rose.
  • Headline inflation continued to moderate but remained well above the Fed’s 2% target.
  • Despite still strong inflation, the Fed decided to hold rates steady at its June meeting.


Lower inflation, better than expected corporate earnings, and continued strong employment all provided fertile ground for the stock market’s advance in the second quarter. Despite the May 1 failure of a third significant bank (First Republic), another increase in the Federal Funds rate the next day, and the Federal debt-ceiling drama in late May, the S&P managed to return 2% in the first two months of the second quarter, aided by market excitement around all things Artificial Intelligence (AI). The resolution of the debt impasse and the Fed’s decision a couple of weeks later to pause rate hikes provided all the reason needed to close out the quarter with a strong finish. The S&P 500 gained 6.6% in June, bringing its second quarter return to 8.7%. For the first six months of 2023, the S&P 500 has returned 16.8%.  This year’s performance means that the S&P 500 is now up 25.9% since its October low, though it remains below the high reached at the end of 2021. (All returns are total returns, including both price changes and any dividends paid.)

As in the first quarter, investors focused their love on a small set of companies. Seven stocks (Apple, Microsoft, Nvidia, Amazon, Tesla, META, Alphabet) contributed 65% of the S&P 500’s return in the second quarter. Not surprisingly, large cap stocks outperformed small caps by 7.8% while growth stocks led value stocks by 4.0%. For the first half of the year, the same seven stocks contributed 74% of the S&P 500’s return. Again, not surprisingly, large cap and growth stocks outperformed small cap and value stocks, this time by 16.4% and 9.1%, respectively. However, despite the advances this year, growth stocks have trailed value stocks by over 20% since the end of 2021.  

As in the first quarter, three sectors – Communications Services (Alphabet, Meta), Information Technology (Nvidia, Apple, Microsoft), and Consumer Discretionary (Amazon, Tesla) – provided double digit gains and most of the index’s return. Nvidia’s very strong earnings report (due to growing demand for chips to power AI applications) led the robust performance of the Information Technology sector. Meanwhile, the Utility and Energy sectors posted negative returns for the third quarter in a row.  The performance of the S&P 500 this year has also been driven by the same three sectors. The year-to-date return for the Communications Services, Information Technology, and Consumer Discretionary sectors has averaged 38.6% compared with 1.8% for all the other sectors. Reflecting this concentration of performance, the S&P 500 (which is a market-cap weighted index) has returned 16.9% this year while an equal-weighted index of the same stocks returned only 7.0%. 

While earnings for most companies beat “expectations” in the first quarter, S&P 500 earnings (as reported) increased only 5% in the first quarter. However, Wall Street analysts currently expect earnings to gain strength as the year progresses and for 2023 earnings to finish 15% ahead of 2022. Still, as often happens, this consensus estimate for 2023 has fallen (coincidentally) 15% since the start of the year. With its advance this year, the S&P 500 now trades at 22 times estimated 2023 earnings.  As a result of the increased concentration of performance in the S&P 500, the ten biggest companies now make up 32% of the index weight and have an average P/E ratio of 29.3 times the next 12 months’ earnings, while the average P/E for the remaining stocks in the index is only 17.8.

Fixed Income

The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index rose 0.1% in the month of May and 3.8% for the trailing 12 months. However, the core PCE (excluding food and energy) increased 0.3% for the month and 4.6% for the year. While the rate of inflation continued to moderate in the second quarter, interest rates rose as investors concluded that the Fed would not be easing as soon as expected. 

Having slowed the pace of its Fed Fund rate increases to 0.25% in February, the Fed’s Federal Open Market Committee increased the rate by another 25 basis points in May to a range of 5.0% – 5.25%. 

Given the slowing rate of inflation and the understanding that there is a substantial lag in the effects of monetary policy, the FOMC chose to leave rates unchanged at its June meeting. However, committee members indicated that they were likely to increase rates two more times in 2023 and the median projection for the end of the year Fed Funds rate was 5.6%, close to the market’s expectation of 5.4%. At the same time, the Fed continues the process of Quantitative Tightening, letting $95 billion of its bond holdings mature every month without being reinvested, which increases the amount of government debt the market must absorb and, all other things being equal, leads to higher long-term rates.


With first quarter GDP estimates revised up twice in the second quarter, the stronger than expected strength of the economy led bond investors to revise upwards their expectations about the level and direction of interest rates. At the short end of the curve, investors increased their year-end estimate of the Fed Funds rate from 4.4% at the end of March to 5.4% at the end of June. As investors demanded higher yields, bond prices fell, and most bond returns were negative for the quarter. The broadest measure of the fixed income market, the Bloomberg Aggregate Index, returned -0.84 in the second quarter. The yield on two and ten-year Treasuries increased by 84 and 33 basis points, respectively, but despite the greater increase in the two-year yield, its shorter duration and higher coupon kept its loss at only 0.89% compared to a loss of 1.91% for the ten-year. Corporate bonds outperformed Treasuries as risk premiums (spreads) contracted. The only area of the bond market to deliver positive returns in the quarter was the below-investment grade sector where tighter spreads limited losses from to rising Treasury yields.

Market Environment

The widely anticipated recession of 2023 keeps failing to show up. While the manufacturing sector of the economy has been weak for months, the service sector has remained strong. Healthy consumer spending has been supported by unusually high savings produced in 2020-2021 by both fiscal largesse and reduced opportunities to spend. At the same time, employment levels have remained high and labor shortages, particularly in the service sector where most people are employed, have boosted wages. These positive conditions contributed to the better than expected 2.0% GDP growth in the first quarter. 

The biggest questions facing investors as the third quarter begins are what additional actions the Fed will need to take to achieve its 2.0% inflation target and will the much-anticipated recession result from these actions. The most recent report on inflation (the July 12 CPI report) showed that the rate of inflation continued to ease as supply chain problems are resolved and the price of energy normalizes after its spike following the invasion of Ukraine. Yet there are several reasons to believe that the next stage in the battle against inflation will not be as easy.

Wage gains and the tightness of the labor market make the Fed’s job of reducing inflation more difficult. Based on the most recent Bureau of Economic Analysis report there are 9.8 million jobs available and only 6 million people unemployed and looking for work. Some of this mismatch stems from demographic driven reductions in labor supply (accelerated by COVID). Recent wage increases and falling labor productivity (perhaps driven by work from home) also exert inflationary pressure. These challenges in the labor market, an increased focus on the reliability of supply chains, and substantially greater government spending all suggest that it will be harder to reach the Fed’s target without further monetary tightening. 

Despite the substantial rise in interest rates over the last 15 months and ongoing Quantitative Tightening over the last year, the economy has continued to chug along.  Equity investors seem to have concluded that the Fed will achieve its “soft landing” and the consensus among economists is that the U.S. economy will eke out very modest growth this year. However, the inverted yield curve shows that the bond market expects a recession and with the S&P 500 only 4.9% below its all-time high at the beginning of 2022, there is clearly not a lot of room for disappointment in the equity market. 

Sources of potential disappointment are not hard to find. For example, while the most recent (6/29) report on first quarter real GDP was revised upward to 2.0%, the same report showed that after-tax corporate profits have declined for the last three quarters. The Institute for Supply Management’s survey of purchasing managers has shown signs of a manufacturing recession since last November. And although corporate profit margins remain close to all-time highs, several favorable corporate tax provisions from the 2017 tax legislation are phasing out at the same time that labor costs are rising and consumers are becoming more resistant to price increases. 

Another challenge to corporate earnings is the fading of government stimulus and the effect of that on the consumer. The strength of the consumer has resulted in large measure from the fiscal stimulus provided in response to the pandemic and more recently the Inflation Reduction Act of 2022. But much of the $4.6 trillion in COVID relief spending has been spent and estimated “excess” savings are expected to be consumed over the next 6-9 months, while subsidies such as student loan payment suspensions are set to end soon. A side effect of all this government support of the consumer is that the Federal debt has climbed from $23 trillion in the first quarter of 2020 to $31 trillion in the first quarter of this year. At 121% of GDP, this debt is at a higher level relative to the economy than even during World War II. As savings and subsidies disappear and higher interest rates work their way through the economy, the ability of the government to provide additional stimulus will be severely constrained and the challenges for both equity and bond markets will grow.

Focusing on Long-Term Results

These remain challenging times for all investors. Navigating the risks in this market environment requires consistent focus on long-term goals and an appropriate allocation of assets. At Buckhead Capital, we work hard to help our clients clarify and achieve their financial goals. We try to understand the lessons that markets have provided and to use that knowledge in structuring portfolios to preserve and grow our clients’ capital. We continue to emphasize achieving an appropriate return for the risk taken. We do this not only through asset allocation (the mix of stocks, bonds, and cash) but also through individual security selection, sector weightings, and, in fixed income, target portfolio maturities/durations. This attention to risk management has historically produced better risk-adjusted returns over full market cycles.  We continue to believe that this market cycle will be no exception.

Walter DuPre

Walter DuPre

Walter serves as an Advisor and Portfolio Manager on the firm’s Diversified Value, High Net Worth, and Value Equity investment teams. He joined Buckhead Capital in October 1996. Previously, he was the Managing Director of the Southern regional office of Prudential Capital Group, which was responsible for the management of a portfolio of $2.5 billion in private debt and equity securities. Walter received his B.A. in English and American Literature from Brown University and an MBA from Columbia University. He holds a CFA charter and is a member of both the CFA Institute and the CFA Society Atlanta.