Mondays are great for me because they bring a fresh onslaught of equity strategy research reports. This week most of them said the same thing - namely that the economic recovery is largely priced in to equities and returns will be harder to come by in the months ahead.
B of A Securities U.S. quantitative strategist Savita Subramanian raised her S&P 500 profit estimates for 2021, which sounded great. But then she added: “We expect secular headwinds [to] pressure margins, including potential higher corporate taxes, higher cost of debt, wage pressure” and she noted that companies that beat on earnings last quarter were not met with higher stock prices. Above-consensus earnings growth was already reflected in stock prices and Ms. Subramanian believes this remains the case.
Morgan Stanley U.S. equity strategist Michael Wilson was on the same page with his Weekly Warm-up report. Mr. Wilson noted the same investor lack of interest in earnings beats before predicting an imminent decline in earnings revisions breadth – the percentage of companies raising forward profit guidance.
Citi U.S. equity strategist Tobias Levkovich has been arguably the most bearish strategist among major Wall Street firms. His PULSE Monitor: Still Euphoric and Thus Risky research report released over the weekend also expressed concern with the profit outlook, calculating that only four of the 11 major U.S. market sectors were experiencing rising earnings estimates in April.
It’s not unheard-of that strategists agree like this. It is rare that a market trend becomes so apparent that three major strategists cover the same topic within the space of a single weekend.
These are U.S. research houses but the conclusions are easily applicable to the TSX. The market sectors that have benefitted most from the early-cycle recovery from the March 2020 lows – resources and banks in particular – are those that dominate the Canadian benchmark. So if, as Mr. Wilson believes, markets are transitioning to mid-cycle patterns then the positive relative performance of domestic stocks may be ending.
The takeaway from this strategist chorus is investors should prepare for a counterintuitive scenario where economic growth is strengthening as businesses re-open while equity markets stagnate. Stock prices are forward-looking and it appears that the rally of the past year has already accounted for a post-pandemic growth surge.
What happens after that will depend on the extent to which the year-over-year profit gains in 2021 are sustainable. After a global economic near-halt during the pandemic and subsequent unprecedented monetary and fiscal support, that future is far too tough to call.
-- Scott Barlow, Globe and Mail market strategist
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