Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
I wrote about the potential end of the U.S. bear market for the Globe Investor newsletter last week, but Morgan Stanley strategist Michael Wilson is having none of it,
“With the S&P 500 rally now crossing the 20-per-cent threshold, more are declaring the bear market officially over. We respectfully disagree due to our 2023 earnings forecast… …Earnings recessions over the past 70 years have often bottomed very close to 16 per cent, the decline we are forecasting for 2023 EPS growth based on output from our earnings models. Our historical analysis suggests it’s unlikely that the earnings recession will stop and reverse at current levels, and we note that the downward estimate revisions necessary to reach our ‘23 estimate ($185) by year end are common in prior earnings recessions … We also point out that earnings quality, as measured by net income-to-cash flow, recently reached its weakest level in the past 25 years. "
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A DBRS Morningstar report on Canadian bank earnings is indicative of a trend where analysts see them as continually dominant franchises, but with an increasingly cloudy profit outlook,
“Q2 2023 sequential earnings were negatively affected by lower revenues and rising PCLs, as concerns mounted related to loan risks and the overall health of the economy. Credit quality continued to normalize in Q2 2023 from unsustainably low levels. A potential recession, combined with materially higher borrowing costs for creditors, would likely amplify credit deterioration beyond normalized levels. NIM expansion and lending volumes are expected to moderate during the remainder of F2023, along with a continued ramp-up in PCLs, dampening earnings growth. The Big Six, however, remain well positioned with sound liquidity and adequate capital levels. ‘DBRS Morningstar expects to see further deterioration in asset quality metrics in the second half of F2023 from these still unsustainably low levels. The household debt-to-disposable income ratio improved to 180.5 per cent in calendar Q4 2022 from 184.3 per cent in the prior quarter but remains elevated. Canada’s household debt as a percentage of its GDP is the highest of any G7 country and is the only one above 100 per cent, making Canadians more susceptible to interest rate hikes and more vulnerable to any potential increase in unemployment,’ said Carl De Souza, Senior Vice President, North American Financial Institutions Group, at DBRS Morningstar.”
“Large Canadian Banks Q2 2023 Earnings Round-Up: PCLs Ramp Up, Driven by Weakening Credit Quality and Macroeconomic Concerns” - DBRS Morningstar
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The Bank of Canada got blamed for U.S. market volatility, according to CIBC economist Avery Shenfeld,
“The most unusual headline we saw wasn’t in reference to air quality, but to a dip in the U.S. equity market that was attributed to a Bank of Canada rate hike on Wednesday. … The FOMC could indeed opt to follow the Bank of Canada’s lead next week, but perhaps it would also note what happened two days later, when Statistics Canada reported a two-tick climb in the unemployment rate and a drop in employment and hours worked. That’s a reminder that we can’t be too sure about when the cumulative impact of a steep climb in rates in the past year might start to show up in the data, even if it hasn’t yet. The Fed has already moved further than either the RBA or the BoC, and so we lean towards it opting to hold its fire in June … The fact that U.S. equity markets reacted at all to a Bank of Canada decision was revealing, even if the Fed really doesn’t pay much heed to decisions in Ottawa … What the Bank of Canada underscored is that the economic slowdown that hasn’t really arrived, and its impact on earnings, still lies in our future as well as America’s, because central banks see that as a precondition for getting inflation to 2 per cent. You can’t blame Canada for that reality”
“Blame Canada” – CIBC Economics
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Diversion: “Tag Yourself: Here Are the Most Personal Ways Advertisers Target You” – Gizmodo
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