September is shaping up to be an interesting month for the stock market: Bullish investors are pulling in their horns just as retail investors are starting to feel upbeat about stocks again.
The latest weekly sentiment survey from the American Association of Individual Investors showed that bullishness among small investors has jumped to about 42 per cent, above the long-term average and up about 15 percentage points from the low in early June.
This group of investors is often seen by the pros as a contrarian indicator: They get too enthusiastic about stocks when markets are about to stall and feel fearful about stocks when markets are about to take off.
Given that the AAII survey showed a sharp dip in bullishness in June, just as stocks were embarking upon an impressive rally, the reputation among small investors seems intact.
But what’s also making the end of the summer interesting is that some financial commentators not known for being squeamish about stocks are sounding, well, a little squeamish.
Eddy Elfenbein, who writes the popular Crossing Wall Street blog, believes that the longer-term outlook looks sound, but that stocks could go sideways or down from here.
“Over the next few weeks, Wall Street will face its greatest enemy – uncertainty,” he said. “Not only is there an election coming, but there are still unresolved issues in Europe, plus the domestic earnings outlook isn’t quite so rosy.”
And yes, that prediction comes despite his upbeat view on the U.S. housing market and a belief that stocks are cheap relative to estimated earnings.
I pointed out earlier in the week that Ed Yardeni, chief investment officer of Yardeni Research, is also taking a cautious view on the stock market, despite his overall bullishness.
“While I’ll be happy if my yearend S&P 500 target of 1450 is surpassed in coming months, it’s getting harder to see much more near-term upside for the S&P 500 unless there is more upside in the forward P/E,” he said in a note on Tuesday.
In other words, analysts are going to have to revise earnings estimates upwards to get the rally moving – yet that might not happen. As Mr. Yardeni explains, earnings are expected to grow faster that revenues this year and next, but that can only happen if profit margins also rise.
“I’m not as sure that margins will increase this year and next year,” he said. “Another characteristic of an aging bull market is a peak in the profit margin. When margins peak, earnings growth tends to slow down to about the pace of revenue growth, which also tends to slow down in an aging bull market.”