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‘The Recessionary Message Is Getting Ever Louder’, SocGen Warns

"And there’s the problem".

Let’s say, for argument’s sake, you manage to extricate yourself from trade worries, domestic political turmoil, geopolitical chaos and, of course, the daily onslaught of negative economic data.

In that hypothetical, you’d be free to focus on what should matter for equities – namely, corporate profits. Of course, corporate bottom lines are inextricably bound up with trade, geopolitics and macro fundamentals, but amid the cacophony, it’s easy to forget that at the end of the day, investing in stocks is about staking your claim to the assumed long-run prosperity of corporations, not necessarily about making a call on impeachment or next month’s ISM or debating the relative merits of this or that Mideast strategy.

There’s just one problem. As noted over the weekend, Q3 2019 is set to be the first quarter of negative EPS growth in more than three years in the US. Ex-Energy, the third quarter is expected to see the first YoY decline in earnings since Q2 2009.

Read more: Are You Ready For The First Y/Y Decline In Corporate Earnings Ex-Energy Since 2009?

In 2018, you could always point to blockbuster bottom line growth and the resiliency of the US economy as a rationale for remaining bullish despite a tumultuous political environment, economic deceleration abroad and a hawkish Fed.

Fast forward to 2019, and the US economy has decelerated along with corporate profits, as the fiscal impulse wanes.

In a Monday note, SocGen’s Andrew Lapthorne strikes a characteristically cautious tone in warning that “the recessionary message is getting ever louder”.

After citing the veritable collapse in global bond yields and persistent underperformance of economically-sensitive sectors and markets (September’s “anomalous” rotation flirtation notwithstanding), Lapthorne notes that “globally, analyst sentiment has slumped, typical of a negative EPS growth outlook”.

But, with falling bond yields mechanically supporting equities, do earnings even matter anymore?

“Well, that’s a question we often ask ourselves”, Lapthorne says, waxing colloquial, on the way to saying that the answer still “seems to be a resounding Yes”.

In the visual below, SocGen “decile ranks changes to company 12m forward EPS targets against the coincident performance of stocks over the same period”.


Clearly, that suggests earnings and prices are still correlated.

“So earnings do still matter”, Lapthorne insists. “And there’s the problem, as earnings are now going down, not up.



3 comments on “‘The Recessionary Message Is Getting Ever Louder’, SocGen Warns

  1. There is a feedback loop between falling bond yields and decelerating earnings. Those yields are falling because those earnings are slowing/declining (and other stuff which correlates to earnings).

    So does that mean the more earnings fall, the more yields fall, and “falling bond yields mechanically supporting equities” results in equity prices staying high?

    No, for two reasons.

    First, the “mechanically supporting” effect is based on DCF valuation. Yes, falling bond yields can reduce cost of debt rD which reduces discount rate WACC which raises NPV. But rD is not the only thing that goes into WACC, so at some point further reductions in rD no longer reduce WACC much. Taking rD from 5% to 3% might reduce WACC from 6.875% to 6.125%, from to 1% might reduce WACC to 5.375%, but then you’ve hit the floor for WACC and NPV starts going down with earnings (cash flow actually).

    Second, the growth assumptions in your DCF are more important than the discount rate. When earnings fall enough that growth g start sgetting cut, the NPV goes down despite mecahnical support from falling yields.

    I think this explains, partly at least, why the EPS growth to price change curve is not flat, but slopes significantly when EPS growth gets low/negative enough.

  2. vicissitude

    Recently, while surfing for garbage on twittter, I came across a little thread that I found interesting, i.e., one that has some people saying that Warren will tank stocks, while others view her as kinda pro-business.

    The idea that trump is in some way causing stability is utterly sickning and lays bare a case that there are far too many people in the world, with heads buried deeply into tarpit sands that think things are going well with trump and MAGA bullshit.

    S&P 500 Historical Prices by Month

    Oct 7, 2019 2,938.27
    Jan 1, 2017 2,275.12

    S&P gained 663.15 pts or 29.14% going on 3 years, or about 10% per year.

    As for treasury yields (pardon the formatting:

    Date 1 m/2m/3 m/6m/1 yr/2 yr/3 yr/5yr/7yr/10yr/20yr/30 yr


    0.46 N/A 0.51 0.59 0.79 1.16 1.43 1.88 2.19 2.41 2.72 2.99


    1.76 1.76 1.75 1.73 1.64 1.46 1.41 1.38 1.47 1.56 1.85 2.05

    Needless to say, the choir understands that all treasury yields are fully distorted into chaos since about January 20, 2017 — so how is electing someone like Warren going to tank the markets and destroy America? I think Warren should have come out more conservative and not pushed too many agendas — simply because the last thing America needs is a reason to be more divisive and polarized — simply having a sane person in office will be a God-send. Unfortunately, I think the entire Democratic party has proved itself to be uncommonly stupid and unable to make themselves look reasonable. Nonetheless, in the face of all the criminal-like behavior of trump and the GOP, the stupid Democrats just might have a decent chance to gain far greater control after the election. But, how does one convince people that trump hasn’t helped the economy and in some way, made America great? Maybe the millions of people that hold duel part time low paying jobs, who have no insurance, will all collectively vote-in GOP candidates, so that what little they have left, will be reduced to almost nothing — and then the mighty 1% elite parasites will steal anything not nailed down, including every available vote — what a nailbitter, a race towards stagnation and decay, where nobody has a clue, as the wheels fall off as baby Boom Hell sucks everyone into the void.

    Oct 5, 2019, 12:01pm
    Trump’s Economy Is Losing Steam (Chuck Jones)

    The current GDPNow estimate for the September quarter remains below 2%, and most forecasters have the economy growing just above 2% going forward after last year’s 2.9% tax cut sugar rush wears off.

    At 1.8% September’s growth rate would be slightly lower than the June quarter’s and would be the second lowest of Trump’s presidency. And if December quarter’s growth rate also comes in around 2% the full year growth rate would be about 2.3%, a drop from last year’s 2.9% when the tax cut juiced the economy.

  3. Trumps base is largely a fan base. The way they keep score has nothing to do with what is best for the country or for them. The only way to bring rationality to this fan base is to change the way they score the game.

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