‘Officially Over’: Subramanian Calls Time On Bear Market

“The bear market is officially over.”

So said BofA’s Savita Subramanian on Friday, in a notable call from a notable strategist at a notable bank. Perhaps “call” isn’t the best word. She was, in part, just editorializing around the 20% rally for the S&P from the lows. But her cadence suggested she doubts stocks will revisit the October nadir.

Some readers will invariably posit a discrepancy between Subramanian’s remarks and more cautious commentary from her colleague Michael Hartnett. Subramanian has the house S&P call. I’ll just leave it at that.

The figure above is the “postmortem” — the comparison of 2022-2023’s “crashless” drawdown with historical bear markets.

Amusingly, Subramanian alluded to the fictitious nature of our “bulls” and “bears,” much as I did first thing Friday morning. “We don’t put a lot of stock (pun intended) in arbitrary definitions,” she said, of the S&P’s 20% rally from the October lows.

And yet, as she was quick to note, the world’s risk asset benchmark par excellence has continued to rally over the next 12 months 92% of the time after crossing the 20% threshold. That’s psychology (i.e., human behavior) for you. On average, the return is 19% looking back seven decades.

As discussed in “Will The Flows Floodgates Reopen For Stocks?”+ positioning (or, more aptly, under-positioning) arguably presents the biggest upside risk for equities. But under-positioning and poor sentiment typically go hand-in-hand, and depressed sentiment, when it turns, can likewise be a powerful catalyst.

“Sentiment, positioning, fundamentals and supply/demand support that being underinvested in stocks and cyclicals is still the key risk today — the more likely direction of surprise is still positive,” Subramanian said.

She proceeded to answer five key questions about the ostensible new bull, starting with the quandary of the gloomy investor. “What will it take to get investors bullish again?” she asked, before answering:

The official end of the bear market might help, but the wall of worry could continue until investors feel pain in long bonds or FOMO in equities. Investors have bought into a singular equity theme (A.I.) but a broader bull case for stocks can be made: We are off of ZIRP and real yields are positive again, volatility around rates and inflation has subsided, estimate dispersion (earnings uncertainty) has declined and companies have preserved margins by cutting costs and focusing on efficiency. After a fast hiking cycle, the Fed has latitude to ease. The equity risk premium could fall from here.

Needless to say, that view isn’t shared (at least not in full) by everyone. Mike Wilson, Subramanian’s counterpart at Morgan Stanley, would doubtlessly beg to differ on some points.

While discussing 2023’s re-rating (the driver of the unloved equity rally), Subramanian posed this question: “If stocks are reviled, why is the S&P trading at 20x?”

Elevated multiples are, of course, one go-to talking point for bears, including Wilson, who doesn’t believe the worst of the earnings recession is over in the US. For Subramanian, earnings should trough in Q3. If that turns out to be the case, this will go down as a very shallow profit contraction.

The figure above hints at Subramanian’s answer to the multiple question. If you average the red annotations (i.e., the trailing index multiple around trough earnings), you get ~20x.

“20x is not the reason to be bearish,” Subramanian said. “When earnings fall as they are today, P/E ratios expand. It’s just math.”

She also offered a helpful reminder: “For stocks, the best recipe for loss avoidance is time,” she wrote. “Since the 1930s, if an investor sat out the 10 best return days per decade, his/her returns would be just 40% compared to ~20,000%.”

Think on that over the weekend.