An aggressive bond rally and the fading of 2021’s outperformance across various manifestations of the recovery trade in equities culminated early this week in a fairly dramatic selloff on Wall Street.
The generic narrative is that a growth scare is afoot, brought on by Delta variant concerns, Fed tightening worries, a fiscal stalemate inside the Beltway and ongoing Sino-US tensions.
This narrative is beginning to find expression in questions about where we actually are in the cycle. Morgan Stanley, for example, thinks this cycle will be “hotter and shorter” thanks to stimulus, but the bank remains largely constructive — they’re now underweight bonds in the wake of the rally.
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For their part, JPMorgan wrote Tuesday that in their view, “the latest round of growth and slowdown fears [are] premature and overblown.”
Leadership within equities and bonds “are trading as if the global economy is entering late cycle,” Dubravko Lakos-Bujas wrote, before noting that the bank’s analysis “suggests the recovery is still in early-cycle and gradually transitioning towards mid-cycle.”
Of course, the bank recognizes that the push to reopen economies is hampered in some countries by worries around the more transmissible variant. But JPMorgan, like many others, points to still low hospitalizations and deaths, attributable to vaccinations and natural immunity acquired during previous waves.
The economic reopening, the bank said Tuesday, shouldn’t be conceptualized as a one-time, flipping of the switch. “Reopening the economy is not an event but rather a process, which in our opinion is still not priced-in, and especially not now given recent market moves,” Lakos-Bujas said.
The bank flagged large declines in some reopening stocks, including some the bank noted have “reversed back to last year June levels when COVID-19 uncertainty and economic setup were vastly worse than today.”
JPMorgan backed up their constructive outlook by lifting their year-end 2021 price target and EPS estimate for the S&P to 4,600 and $205, respectively. The bank also lifted earnings estimates for 2022 and 2023. A delayed global reopening is “bound to release further pent-up demand, inventory replenishment, rising profitability for Energy companies, and ongoing policy actions [such as] childcare, infrastructure, etc.,” Lakos-Bujas wrote.
By the numbers, the bank expects cumulative revenue growth of 30% by 2023, while margins should expand to a record high in excess of 13% (figure on the left, below). Gross buybacks may close in on an annual pace of ~$1 trillion over the same period.
Goldman, you’re reminded, expects the corporate bid to be the largest source of net equity demand for the remainder of 2021. Lakos-Bujas noted Tuesday that announcement activity (a precursor to executions and an indicator of C-suite confidence) has rebounded and looks “similar to the surge post-TCJA.” That’s illustrated in the figure on the right, above.
In a separate note, Marko Kolanovic, Nikolaos Panigirtzoglou and others, wrote that the bond rally and general reversal of the reflation trade “was largely technical, driven by CTAs, short-covering and aggressive positioning in a low-liquidity environment.” A rebound is close at hand, they suggested.
“We expect the reflation trade – cyclical stocks, bond yields, high beta stocks, reflation and reopening themes to bounce imminently as Delta variant fears subside and inflation surprises persist, and due to supports from above-trend growth, strong consumer fundamentals, and a low earnings hurdle rate,” Kolanovic wrote, adding that bonds currently “reflect overstated growth anxiety.”
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