Albert Edwards Echoes Wilson: Stocks In ‘Death Zone’

SocGen’s Albert Edwards agrees with Morgan Stanley’s Mike Wilson: US stocks are indeed in the “death zone.”

In a Thursday note, Edwards mentioned Wilson’s adventures on Everest in the course of presenting his own arguments in favor of the notion that equities can’t survive much longer at current high altitudes.

Rather than cite the ERP, Edwards used the PEG ratio. “Aside from the turmoil in the immediate aftermath of the pandemic [it’s] never been higher,” he said.

As you can probably surmise, the reason for the anomalous-looking spike is the ongoing slide in forward EPS growth expectations.

Some of that slide, Albert wrote, “is purely cyclical” given the tendency of analysts’ forecasts to ebb and flow with the perceived progression of the cycle. But, he remarked, the “the latest collapse in analysts’ L/T EPS forecasts is deeper than is cyclically ‘normal.'”

He attributed that to the notion that America’s mega-cap growth champions (and the company analysts who cover them), are coping with the reality of dubious extrapolation from pandemic trends, rather than viewing the stay-at-home windfall as an idiosyncratic event.

Sales growth for some of the biggest names has effectively flatlined given impossible comps, and the poor optics are probably exacerbating analyst concerns looking ahead, as are worries about the cyclical nature of ad and cloud businesses.

As costs remain sticky and sales growth flatlines, the outlook for margins is tenuous, which is why tech layoffs continue to pile up. Margin concerns naturally raise questions about earnings assumptions, and those questions, if left unanswered, prompt cuts to forward profit estimates.

“In addition, the S&P L/T EPS is market cap weighted, so as the IT sector has underperformed, S&P L/T EPS have also declined,” Edwards went on.

Do note that despite declining fairly sharply, the FAMMG cohort still comprises a very large share of S&P market cap, and a huge share of the Nasdaq 100.

That means the re-rating in SPX and NDX to nearly 19x and 24x, respectively, earlier this month, is vulnerable, particularly if US yields continue to rise.

Driving the point home, Edwards wrote that it’s “not just sharply higher cash/bond yields” that pose a threat, but rather the fact that “the current nosebleed level of valuations seen in the US PEG ratio is a result of the ‘growth’ L/T EPS rug being pulled out from under investors.”

As for January’s strong economic data in the US, Albert said “investors would do well to be extremely skeptical.”