Wall Street’s ‘Strategist Short Squeeze’ Goes Mainstream

I have to hold my tongue sometimes.

I’m immeasurably better at doing that now than I was, say, a decade ago. Or even five years ago, really. Sometimes I look back on things I might’ve written or said pre-2016 and shake my head: “That came from an adult? And that adult was me?”

I’m amicable and polite these days, or at least I try to be. But I gotta tell you: I see a lot of “coincidental” similarities between what I write and what shows up on one mainstream financial media outlet every week. (I won’t name the outlet.) I should be transparent: That may not be a reflection of anyone reading what I write directly. I’m not that arrogant or presumptuous. When it comes to size and scope, my following is still best described as “cult.” It may instead be the product of that outlet reading cheap knock-off versions published by less scrupulous, but far more popular, alternative portals. (I won’t name those either.)

One way or another, though, someone is scanning for article ideas. And while imitation is famously the sincerest form of flattery, I can’t say I feel flattered. Instead, I feel like I need to dial up the C-suite at Netflix and ask for tips on password-sharing prevention strategies (notwithstanding the post-earnings selloff, Netflix’s big beat on paid adds for Q2 suggested they’re having some success on that front).

With that in mind, some people are talking about a sell-side “strategist short squeeze.” Allow me to quote me (because no one else will, apparently):

From “Melting Up To 4700” on July 19: [The disparity between spot equities and the average year-end Wall Street target] wasn’t (and isn’t) tenable. The only way you can stay bearish and wrong on stocks in perpetuity as a Wall Street strategist is if you’re the house clown who everyone, including and especially clients, knows not to take seriously. Generally speaking, those aren’t the people with the house S&P call. Simply put: You can’t just sit around and pretend a selloff is imminent forever if your job is to forecast the likely trajectory of a benchmark index that rises over time.

From “Bears Bearing Bear Cases” on July 5: Playing catch-up to an equity market that’s running away from you can end poorly. Spare a thought for top-down strategists who maintained a bearish view during a stellar first half for stocks. Their position isn’t enviable. If they stick with fundamentals-based calls for stocks to sell off and the downdraft never materializes, they’ll be even further behind the curve and derided as hopelessly obstinate. If they turn bullish, the peanut gallery will immediately call it a contrarian indicator — “Stocks are doomed now!” will be the quip. If stocks do indeed fall thereafter, the embarrassment is compounded by the annoying little voices that whisper, “You knew it all along. The selloff was coming. If you’d just waited another month…” There’s no right answer.

I could go on. And on. Regular readers will attest to the fact that I’ve penned some version of that same narrative on probably half a dozen occasions over the past two months.

At the beginning of the second half, the disparity between the average year-end Wall Street target and spot US equities was around 300 points, as shown below.

To recycle some language from the same July 5 piece linked above: You don’t generally want to be looking up at the rally if you’re a strategist who’s been persistently bearish. Clients, assuming they put any figurative or literal stock in what you had to say, might’ve missed some upside.

As it happens, a July 20 SPX year-end target hike from Piper Sandler’s Michael Kantrowitz (the most bearish strategist on the Street) and a good soundbite from Evercore ISI’s Julian Emanuel (to Bloomberg’s Jonathan Ferro), served as great hooks for what I can only imagine was a widely-read piece published on Friday called “After a Misjudged First Half, Strategists Face a Short Squeeze.”

It’s a good article, which is why I’m happy to name it, cite it and link to it. That’s the kind of guy I am. “This fits a pattern in which a series of prominent strategists have had to revise upward their year-end calls — and done so in a way that seemed begrudging,” John Authers wrote, before elaborating on Emanuel’s “strategist short squeeze” concept by way of Soros’s reflexivity.

As stocks rise, big-name Wall Street firms are compelled to raise targets, and that in turn bolsters sentiment and emboldens investors to push the bullish envelope. “The further the market rises, the harder it is for strategists to hold a line that is now looking increasingly bearish,” Authers went on. Hence the “strategist short squeeze.”

The piece also cited notes from SocGen’s Manish Kabra and Credit Suisse’s Jonathan Golub. Regular readers can skip that part though. They’re the same notes cited here on June 21 and July 19, respectively.

The figure above gives you a sense of where targets are now, in July, versus where they stood at the start of what ended up being the best first half for big-cap US tech shares in history.

As you can see, virtually no one expects material upside from current levels into year-end, even after lifting targets. That leaves room for the “strategist short squeeze” to continue.

For what it’s worth, I addressed this issue at some length in July 1’s edition of the Weekly. If you’re not getting the weeklies, I’d (immodestly) suggest you upgrade so that you do. If you are getting them, and you’re forwarding them to other people without asking me first, I’d (gently) suggest that you don’t. Considering the relevance for the “strategist short squeeze” discussion, I’m reprinting a section of the aforementioned July 1 Weekly for all subscribers below.

The financial media is piling on with what I can only describe as thinly veiled derision towards bearish strategists, some of whom are mainstays in weekly market coverage. Bear quotables were all the rage in 2022. Now we’re back to pithy bull punchlines like, “Bears make you smart — but bulls make you money.”

It’s unfortunate, really. There’s a collective unwillingness on the part of all parties involved to admit publicly what everyone should know. This is, in the first instance, a pointless endeavor. I realize some readers aren’t especially fond of philosophical talking points, but you’re presumably here for differentiated commentary. And that’s what I intend to provide.

Stocks, you’re reminded, don’t exist “out there” somewhere, independent of us. They’re not rocks or trees. You can’t forecast what they’re going to do based on a given set of assumptions about purported “fundamentals.” The fundamentals all relate back to the vagaries of human behavior one way or another. There really isn’t a bright line distinction between fundamentals and sentiment.

There are some hard realities behind it all. For example, oil is an input in almost everything, and you have to get oil up out of the ground, which is a very tangible, physical endeavor. But when you think about revenues, profits, discount rates, macro considerations and so on, it’s all just human behavior. How much soda will people want over the next three months? How many pairs of shoes? How many miles will people drive? How many vacations will people take? How much pressure will central banks feel to raise rates based on the read-through of those spending decisions for price growth? Will pressure from politicians eager to please irritable constituents make management teams think differently about pricing decisions? How angry are the protesters in France? What if they keep burning stuff? What will that mean for services sector sentiment in Europe’s second-largest economy? How will Emmanuel Macron react and what will be the impact on an already fraught domestic political environment going forward? What will Vladimir Putin do next in Ukraine? And so on.

Those are your fundamentals, and we pretend equity prices somehow represent a more or less accurate approximation of what they collectively entail for the figurative and literal fortunes of corporations. Stocks generally trade at a premium or a discount to the fundamentals based on what I’ll call “pure sentiment” — fear, greed, despair, euphoria, “FOMO” and the like.

Markets are “efficient” in the sense that people and algorithms attempt to incorporate new information on the fundamental side into prices as quickly as possible. And those prices can overshoot in either direction based on pure sentiment. But the notion that this is all somehow forecastable is a profoundly silly proposition. What are we forecasting? A number representing some arbitrary multiple of the profits derived from the constellation of human decisions and emotions that together comprise economic outcomes.

As you think about equities headed into the back half of this year, I’d encourage you to consider everything said above about the futility of this endeavor and, more importantly, to reflect on the extent to which developments in the 2020s have reminded us that our survival as a species isn’t guaranteed. Mother Nature can destroy us and we’re fully capable of destroying ourselves. If (when) that happens, stocks, bonds, corporations and all other figments of our imagination will disappear forever.

In the meantime, equities will do exactly what we collectively decide based on our economic and political decisions, policy choices and our emotional state as we interact with financial assets. Because how could it be otherwise? Stocks exist only in our minds. Given that, there’s something tragically ironic (and also hilarious) about our complete inability to forecast them.

Suffice to say no one will be paraphrasing me on those points, at least. With credit or without.