A tsunami of corporate earnings will wash over markets in the weeks ahead. Generally speaking, I’d expect plenty in the way of cautious guidance from management.
Bank CEOs were unabashedly constructive about the US economy last week. Considering the macro circumstances, nobody would’ve blamed Jamie Dimon, James Gorman and Jane Fraser for adopting a wary cadence. Instead, they sounded a bit like Fed officials — extolling the purported resilience of the world’s largest economy. Investors will hear from Bank of America and Goldman this week.
Assuming there are some misses in the pipeline and assuming some beats are paired with guidedowns or other hints and winks at the challenges associated with operating a multinational at a time when supply chains remain fractured, inflation is rampant, labor costs are elevated and the dollar is the strongest in decades, a “bad news is bad news” interpretation (by markets) could beget “proper capitulation,” according to BofA’s Michael Hartnett.
Remember: 2022’s bear market is notable for the extent to which equity outflows haven’t really materialized. Capitulation is evident in credit and bonds, but not in stocks. For every $100 that went into equity funds since January of last year, just a few dollars has come out. That figure for credit is around $80. Notably, the tide may soon turn for bonds if the macro zeitgeist is dominated by recession risk instead of inflation. Last week saw the biggest inflow to Treasurys in nine weeks, for example, an $8.3 billion haul.
Positioning is very light, but at some point, a wholesale abandonment of equities, evidenced by large outflows from stock funds, would be helpful: It’d make it easier to suggest the bottom is well and truly in.
Instead, a net $181 billion has flowed into stock funds in 2022 (figure above). $327 billion in ETF inflows easily offset a $146 billion outflow from mutual funds.
As for levels, BofA’s Hartnett had some pretty specific thresholds in mind when it comes to US equities and investor appetite. The inflation shock started in the second half of last year, the first half of 2022 was defined by a historic rates shock and if the combination of a downshift in corporate profits and a recession scare leaves stocks “all done and dusted,” as he put it, “opportunity knocks.”
At 3,600 on the S&P, US equities are “a nibble,” Hartnett wrote. At 3,300, “a bite” and at 3,000 “a gorge.”
As the simple table (above) shows, “gorge” levels would be consistent with some combination of modest additional de-rating and/or a complete loss of earnings momentum.
Asset prices, Hartnett went on to remind markets, are determined by just two things: Rates and profits. That’s potentially problematic, because in the second half, “rates are set to rise and earnings are set to fall.”
The title of his weekly missive was “close but no cigar.” The bank’s pseudo-famous “Bull & Bear Indicator” remains stuck at 0.0.
Public retail sentiment is obvious. They are either deer in headlights or complacently 100%-ing their 401k’s still. I’m a professional prop trader, and I’ve asked my coworkers constantly these past few months. Their and my consensus is we’ve gotten almost 0 freak out calls from non-trader friends/relatives.
Perhaps because everyone is literally waiting for a capitulatory wash out (myself included) we won’t get one this time, or at least not in 2022, it might just be the endless chop from hell until year end.
Wishing I sold my SPY put with the inflation print came in, hoping we have at least 1 bad earnings day.
The “world” wants a final washout and the wise guys all seem to be warily preparing for a tradeable bear market bounce or even a bottom here.
But doesn’t “the market” always seem to gravitate to the the trade that most hurts specs and investors?
If so, the relentless and seemingly endless chop the Evil Twin may be in store.
That’s real bear market behavior, not seen since a brief example back in 2009.
It all fits together. For 10+ years we’ve been rewarded for buying every dip. So a bear market bounce will scare many of us into piling in.
To get The Evil Twin’s scenario, we’d have to see the bounces fade over & over, wringing the buy any dip mentality out of the collective psychie.
“we’d have to see the bounces fade over & over”
That kind of describes SP500 action this year, I think. Apparently need some more “over and over” to fully break the BTD mentality.
One show has indeed dropped. Rates will continue us to rise. The only questions are how much and how fast.
The second shoe corporate profits will also drop soon, I feel, though it may take a few months for the message to get out.
Despite the positive corporate speak and analysts saying the economy is resilient, earnings will likely fall AND with it the excessive P/E ratios many low growth companies now have.
Just look at the those ratios for companies like Ama…., Micro… And App… Are they screaming bargains now? Or after a 10-15% drop?
It will be interesting to see how my decision to hold all of my portfolio (mostly various flavors of SPY/SPYD plus individual holdings in profitable tech companies) throughout 2022-2023 while the world retools itself to a new normal – after inflation and including dividends – compares to those trying to time everything.
I got taught a big lesson when I was smart enough to go 100% cash in Feb 2020, but was not as smart on my re-entry timing. I could have just held and saved myself from all of that stress ( trying to figure out when yo get back in).
I took out some insurance in my portfolio by shorting the Nasdaq. It took a while but basically canceled out my losses in my other holdings since the start of year.
As for the rest, invested predominantly in resources – oil, gas, mines over the last 12 months. I am still having a hard time investing in tech. Some of my favorite undervalued plays – Mu, Klic, Tmsc, Qcom .. just like you, my re-entry strategy did not pan out – got out. I think there is more pain coming.
So went back to (slowing) increasing my holdings in some of my oil/natural gas cos. Fingers crossed.
I run a bottoms-up SP500 valuation, using consensus estimates adjusted for economic outlook.
Primary val method is DCF. Using moderately pessimistic assumptions (or maybe call them “realistic”) of rF +75bp from today, -500bp adjustment to consensus FCF CAGR 2022-2026. terminal growth 2%, this points to 3300 to 3500 -ish “fair value”.
Secondary val method is PE. Using P/E range from 2013-2016 (mid-cycle slowdown, Fed raising rates, SP500 NTM PE range 13.6X to 17.0X) and -20% adjustment to cons 2023 EPS, gives a substantially lower “downside” – in the low 2000s.
Chartwise, 3400 is both the pre-Covid level (Jan 2020) and the lower end of this declining channel that the SP500 seems to be in.
I don’t have a hard time imagining the SP500 declining to pre-Covid levels. I actually struggle to see why it shouldn’t go lower; macro seems “less good” than in Jan 2020 on most counts.
None of this is remotely precise of course. In general I think SP500 has another mid-teens percent decline risk in it, at least.
I would agree – “In general I think SP500 has another mid-teens percent decline risk in it, AT LEAST (my emphasis).”
Another question is the “hard” vs “soft” landing debate. If all the Fed experts and economists could not ( or pretended not to ) see inflation coming and hubris prevented them from realizing (or admitting) what their monetary policies have led to, it is hard to imagine they can somehow manage to steer this (possible) recession to a soft landing …… while flying blind.