This Bear Market Still Has Teeth
"Despite recession fears, S&P 500 consensus 2022 and 2023 EPS estimates have both been revised up so far this year," Goldman's David Kostin wrote, in his latest weekly. The emphasis on "up" is in the original.
Top-down strategists and CIOs are by now just as incredulous about the lack of capitulation from bottom-up consensus as many of the more caustic observers who deal in hyperbole. That is: The "serious" people are now just as concerned as the unserious about the possibility that company
Perhaps many of the analyts are young and rely on recent market dynamics? After all, since 2009 earnings did not really matter to the stock market.
I recall that Goldman (?) issued research showing that something like 90% of stock market gains from 2009 through 2019 were attributable to P/E expansion and buybacks. The absolute total dollar amount of corporate profits hardly budged either.
So we see muscle memory among many analysts and investors. Will they be proven right yet again? They may, but keep in mind that the Fed is no longer your friend as it was over that period.
Age could very well have something to do with it. While I’m sure a bunch of the individual company analysts weren’t on Wall Street in 2001, you’d think a lot of the sector coverage is still supervised by people who’ve been around for a while. If not, then it’s entirely possible that a sizable percentage of the individual estimates that go into bottom-up consensus amount to “unsupervised” forecasts from people whose only experience with recession was COVID. Another reason this is problematic is that management tends to set the bar such that they can clear it going forward. If analysts don’t respond by setting the bar lower, they’re setting up their coverage universe for failure.
I still can’t understand this thing about analysts — stubborn, I guess. I took many finance courses from a gentleman who was a co-founder of the CFA and graded all their exams for more than a decade. In my day, it was only the analysts who would be right or wrong if a company missed the “Street forecast.” Their responsibility was to understand the company and report on it. Company results were never a “miss,” bad analysts were the ones who missed, and I still believe, rightfully so. A miss between a company and an analyst forecast should result in a fired analyst not a 40% dive in the stock. Security analysis is just that, it should expose reality in advance. Company performance also is what it is. Analyst are not company’s CEOs, they are outsiders whose job it is to help the punters understand the performance of the companies they cover. A look at the track records of these guys as successful stock pickers shows just how badly they do their jobs.
you can get some clarity on this topic by checking out Michael Kantrowitz KANTRO from his market strategy work at Piper Sandler. Clear and easy to understand. None of this nonsensical IB stuff. these new york firms except for Wilson at MS (this year) are a travesty. thanks for bringing in the many differing points of view.
They’re not all “a travesty.” As I’m fond of reminding folks from time to time, at the end of the day people tend to perform in a way that they think is consistent with keeping their jobs. So, if there’s a discernible predisposition towards bullishness, there’s a reason for that. Historically, the reason is fairly simple: Stocks go up over time. That almost never gets mentioned. In the age of finance-focused social media, market participants have come to equate perpetual bearishness with being “smart” or contrarianism as tantamount to genius. In reality, being perpetually bearish post-Lehman has been a money-losing proposition, to put it mildly.
The ultimate irony is that many of the same people who’ve spent a dozen years implicitly (and in some cases explicitly) advised the public to sell equities or otherwise stay on the sidelines, simultaneously insisted that central banks were determined to drive all financial assets into the stratosphere. Never has there been a more poignant example of cognitive dissonance than spending every waking hour explaining how policymakers are intent on levitating asset prices and telling your audience (netizens or clients) to sell the exact same assets. Web portals who did that were monetizing clicks to pay their mortgages. As for analysts, the permabearish variety are never bottom-up, they’re always top-down, and they have large followings for their research because it entertains clients, not because clients actually take it seriously. It’s the same reason people read bearish web portals: It’s just tabloid fodder. No institutional investors take any of that stuff seriously even if they read it. If they did, they’d be derelict in their fiduciary responsibilities.
I say all of that in the interest of being intellectually honest. I adopt a skeptical cadence when I write, but the reality is that being bearish is usually the wrong call. Generally speaking, stocks go up, and while I’ve heard people make the (bizarre) argument that if indexes included companies that went bankrupt that wouldn’t be the case, that’s the most absurd exercise in question-begging imaginable.
My question currently is more about these specific circumstances (i.e., the macro conjuncture as it exists in 2022) and the possibility that many company analysts are simply too young to remember even one recession excluding the pandemic.
None of that is to downplay failures of various sorts on the sell-side, but too often we lose track of the fact that the majority of people just want to go to work, eat a sandwich, get a big paycheck and go home. Obviously the dynamics are different depending on what your job is on the sell-side. A day in the life of a trader or a star dealmaker is totally different from a day in the life of some analyst with a mundane job covering big box retailers.
One causal factor of a recession is declining profits. Companies cut spending to defend profit margins. Consumers cutting back spending for whatever reason is another. The Fed often plays the role of Mrs Oleary’s cow. A tell after the fact is stranded investment. The next downturn will reveal these items.
Some time in 1983 I went to a party at a stunning apartment overlooking Lincoln Center. For recent B-school grads. You can imagine how arrogant yet insecure most people were, all strutting about boasting of their early successes.
I enjoyed myself, first claiming I was an analyst covering the chemical toilet industry. “Johnny on the Spot is making a strong showing, but Port-O-San is still the Cadillac of the industry!”
When that only elicited responses like “Uh, That’s interesting, but I just spotted someone I need to catch up with. See you later.”
So I veered to claiming that I worked for a dry cleaning supply wholesaler. “You be amazed by how cut throat the plastic bag and wire hanger markets are.”
Since that garnered equally dismissive reactions, I pivoted to claiming that I was a critic of made-for-TV movies. (Remember those?) That drew a little more interest.
Coda – not long after that, a friend attended a party down in SOHO. When he mimicked me it drew much more interest. He was quickly surrounded by aspiring filmmakers and screen writers.
I do admire a sense of humour.
I’ve noticed another vexing phenomenon of sorts in the contrasting performance of two different stocks I own. One is an old school. mostly small defense contractor which has generally beaten analysts estimates during the pandemic (albeit downwardly revised), but has been explicit to a fault about all the supply and other issues they are struggling with. After every earnings call of late, the stock is slammed as much as 15 to 20 percent on these “concerns,” before it slowly recovers and heads into the next report with much the same set up. The other is a bigger but less profitable materials company which keeps missing estimates, but touts the favorable headwinds and all they are doing to navigate the pandemic. Until recently, this stock trended higher as analysts raised estimates despite their immediately prior misses. As this phenomenon has become more apparent to me, I’ve noticed it occurring when I check out headlines of other stocks that have been crushed despite decent reports, or others that have managed to survive what looks like devastating misses. When I read the earnings call transcripts, inevitably I find the former have tended to underscore all their pandemic frictions, while the latter have tended to gloss over them.