One of the most amusing things about the furious rally we’ve seen in risk assets to start 2018 is the extent to which it’s swiftly made a mockery of analysts’ year-end projections.
On that note, it’s time to update the chart:
It’s looking increasingly like the S&P will blow by Goldman’s “rational exuberance” 2,850 call in short order. That of course raises the following question: if 2,850 was “rational exuberance”, what will Goldman call it once that target is eclipsed by the end of January? We look forward to finding out.
Speaking of Goldman and targets, you’ll recall that the Hang Seng has basically hit the bank’s year-end target proving that this is hardly a U.S.-only phenomenon.
And it’s not confined to equities. High yield has rallied beyond multiple year-end 2018 targets with spreads tightening inside of JPMorgan’s outlook. The same goes for Credit Suisse’s year-end HY target.
Obviously, that doesn’t mean the targets might not ultimately prove to be some semblance of accurate, but that would of course require a correction and if Trump’s Twitter feed is any indication, he’d rather take cues from his “good friend” Xi in China and start locking up journalists for writing negative market commentary than he would risk a drawdown and, according to his “math”, the increase in the national debt a drawdown would entail.
So what do you do if you’re an analyst or a fund manager in this scenario? Well, you simply push back the data of the “market peak”, that’s what you do.
“A majority of investors now expect a peak in equity markets in 2019 or beyond, pushing back the timing by two quarters from December, when the majority expected a top in Q2 2018,” BofAML writes, in the latest installment of their global fund manager survey:
The irony here is that these FMS pieces are always penned by the bank’s Michael Hartnett and here’s what he said in his own year-ahead outlook:
The Big Top: We forecast a H1 top in risk assets as the last flames of QE, US tax reform and robust EPS incite full capitulation into risk assets…target: SPX 2863.
We’re almost there, Michael. We’re almost there.
Heisy, no one knows what the fuck is going on any more. If I did have one question I would want answered it is this: who is buying stock index funds, and why are they buying? I simply can’t identify a single bullish theme or thesis that has merit right now. The only possible explanation is the greater fool theory. You know how much I love my Bitcoin, but we all see how that thesis works out. Maybe Bitcoin and stocks aren’t too different any more.
I second that. Nobody has any small clue about what the holy fuck is happening. It absolutely feels like someone accidentally left on an algo with unlimited leverage that has a single buy command.
This is just that crazy shit that happens just before the end of every bull market. We’re in the final act.
Free Capital has a point, BUT, the wild card has been all this juicy central bank money from around the world. They’re printing and dumping it into the financial markets, so really, what we could be seeing isn’t a rational or irrational exuberance of any kind, but a revaluation due to the effects of a hidden inflation nobody can calculate.
Strange times
…since 2009.
Here’s my thought on what we’re seeing. Let’s say you have a profitable company, with a clean balance sheet and no deferred tax, that’s sitting at $1 EPS and 20x earnings – that’s a net profit before tax of about $1.79 (assuming 35% fed and 9% state tax rates). That same $1.79 now yields a $1.25 EPS. Which would drive that 20x earnings multiple to 25x in the near term. Theoretically, if you were happy to own that company in December at $20, you should still be happy to own it now at $25.
he average effective tax rate among the profitable large corporations was 16.1%, under federal tax treatment before the reform
tax rates are tax rates… so either you’re referring to the average “effective” tax rate in terms of tax on gross profit, rather than NPBT; or you’re talking about the average tax rate on net profit across all big corporations, of which this data is skewed dramatically because of the huge number of corporations which have been paying no tax due to deferred tax recapture on previous losses (such as mine). Unfortunately, corporations with a large deferred tax asset on the balance sheet just took a huge write-down, and are only being hurt (on paper) by the tax break.