1,000-Point Gap Opens Between S&P Bulls, Bears

The “doubt proved misplaced,” Bloomberg’s Lu Wang wrote Tuesday, as US equities marched toward another day of gains.

“Doubt” was a reference to last week’s deluge of foreboding news encompassing everything from surging virus caseloads to the collapse of the US-backed government in Afghanistan.

The same linked Bloomberg article noted that “potential dip buyers were seeing plenty of bleak headlines” during what counted as a “selloff.”

The “selloff” was really just a 2.8% high-to-low move in US equity futures. It was short-lived, but as Nomura’s Charlie McElligott noted, “a lot of funds were rushing to cut ‘net exposure’ into last week’s vol market spasm, so many were actively shorting into the move lower in spot.”

Data from Goldman’s prime desk showed short sales outstripping long buys by a 10-to-1 ratio over four days. That may have set the stage for a short squeeze as vol-sellers came quickly back to the market, while hedges were monetized into the vol spike.

Read more: ‘A Good Ol’ Fashioned Short-Squeeze’

It’s not terribly difficult to suggest this is a perilous dynamic, as it leaves everything wound tight or “coiled,” as McElligott put it Tuesday.

But behind it all is robust profit growth, a still-strong economy and, now, nods to PBOC easing.

To be sure, I’m sympathetic to the so-called “triple peaks” thesis, which leans heavily on the idea that it’s the rate of change in growth, profits and stimulus that matters. And yet, at the same time, growth is likely to remain nominally high, more fiscal stimulus is on the way in the US and even strategists sticking with what count as “bearish” S&P targets have recently been forced to “mark to market” (if you will) when it comes to corporate profits.

Wells Fargo’s Chris Harvey finally threw in the towel. His year-end target for the S&P was 3,850. With the benchmark closing in on 4,500, he raised his target to 4,825, pointing to, among other things, the rapid recovery in earnings. Recall the figure (below). The simple annotations are Morgan Stanley’s.

Harvey’s upgrade widened the gap between the most bullish forecast for the benchmark and the most bearish to 1,000 points. In an amusing blog post, Bloomberg’s Elena Popina noted there’s no consensus within firms either, or at least not between advisory and equity strategy. If you have a terminal, you can read her quick post for yourself. I won’t steal her punchline(s).

One person who’s been consistently constructive (and remains so) is JPMorgan’s Marko Kolanovic, perhaps the most recognizable name on the sellside. “We continue to believe that the setup for equity markets will stay positive into year-end,” strategists led by Marko said, in a new note, adding that they’re “stay[ing] positive despite the increasingly bearish narrative by numerous pundits.”

Whenever I read something like that, I always think: “My god, I hope no one would describe me as a ‘pundit.'” I’m an impartial observer. And not just (or not even primarily) of markets. But of socioeconomic trends and, most importantly, life in general.

Anyway, Kolanovic and co. went on to suggest that “Q3 and Q4 reporting seasons will likely continue to produce positive EPS surprises relative to consensus, especially given that current S&P 500 EPS expectations for the second half are below Q2 EPS.”

When you consider that, do note that consensus woefully underestimated the strength of earnings growth in Q2.

Some strategists (and pundits) have taken to emphasizing the deceleration in the pace of earnings revisions, but for JPMorgan, the more important observation is that “revisions tend to stay in positive territory as long as composite PMIs remain above 54.”

As for the de-rating thesis, JPMorgan reckons multiples “should generally hold their level, despite some likely move up in bond yields.”

Earlier this month, Kolanovic said the low for benchmark US yields was likely in and that the reflation trade should regain its footing going forward. Notwithstanding the protestations of sundry pundits.