SocGen’s Andrew Lapthorne is a guy who likes to rain on your bullish US equities parade.
See, Andrew is in touch with an increasingly unpopular concept called “reality.”
Reality isn’t any fun in a market where your favorite companies are i) trading at multiples that have no historical precedent, and ii) levered up to the point of no return.
As long as market participants persist in not acknowledging reality (or, as Deutsche Bank’s Aleksandar Kocic recently put it, as long as Wile E. Coyote doesn’t look down), the madness can continue. But eventually, gravity will reassert itself.
In any event, Lapthorne is out with his latest on Tuesday and he thinks maybe “reporting season is powering US equities into dangerous territory.” More below…
Global equity markets finished April strongly, inspired by a surging Eurozone now assuming a relatively benign outcome to the French election. MSCI World rose 1.9% last week, leaving the index up 1% over the month and 7.2% year-to-date. The Eurozone was the clear leader, enjoying the rare feat these days of both a strongly rising equity market and currency; the 3.4% euro gain last week translated into a 5.3% US dollar gain. Japan was also a strong performer last week, but that was largely currency related.
Away from the politics there is of course the US reporting season, or the game of ‘retreat then beat’ corporates like to play each quarter. Rui Antunes has been updating of our reporting season chart. It overlaps analyst upgrades and downgrades with the number of companies reporting each week. What is clear from the chart is these events are very much synchronised, with downgrades dominating during the quiet non-reporting weeks only to surge upwards when companies start declaring their numbers.
Does this matter? Well, the latest surge in US equities and the corresponding drop in the VIX have gone hand in hand with the reporting season and, yes, 45% of the S&P 500 have seen an improvement in 2017 EPS expectations so far this year. But US equities are known to be expensive and with the likes of Alphabet and Facebook relative strength indices (RSI), “to name but two stocks”, rarely this overbought, this could leave many US equities vulnerable once the reporting season ends in a couple of weeks time.