Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities’ popular monthly survey of institutional investors uncovers a whole new world of pessimism. Investors were surveyed between June 3 and June 10th,
“Wall St sentiment is dire but no big low in stocks before big high in yields & inflation, and the latter requires uber-hawkish Fed hikes in June & July … All time low in global growth optimism (net -73%), stagflation fear highest since June’08, profit outlook worse since Sept’08 (Lehman); CIOs telling CEOs to play safe (44% want stronger balance sheets vs 30% desire for capex & 18% for buybacks) … Net 79% expect higher short rates…compared with prior market lows when net 53% (average) expected lower rates … Most crowded FMS [fund manager survey] trades are #1 long oil/commodities, #2 long US$ (note May’21 most crowded trade was long Bitcoin); bigger picture FMS investors are long cash, US$, commodities, healthcare, resources, high quality, value>growth; investors short bonds, EU & EM stocks, tech & consumer.”
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Goldman Sachs U.S. equity strategist David Kostin wasn’t much more optimistic than fund managers in his Weekly Kickstart report,
“The Fed’s battle with inflation has put a ceiling on equity valuations … The S&P 500 NTM [next 12 months] P/E has fallen from 21x at the start of this year to 17x today alongside a 200 bp tightening of the GS US Financial Conditions Index … Despite the 18% YTD S&P 500 decline, equity valuations remain far from depressed. The median S&P 500 constituent’s P/E ratio of 18x ranks in the 87thpercentile since 1976. For context, in March 2020 the median stock’s P/E was 14x … Our base case outlook is that valuations will remain roughly flat while earnings growth lifts the S&P 500 to 4300 at year-end 2022 … We expect further downward revisions to consensus earnings estimates. Business inventory/sales ratios broadly remain low, suggesting that few companies will struggle with the magnitude of inventory challenges faced by TGT unless demand contracts sharply .. Margins have driven the majority of recent analyst cuts, but estimates still appear too high.We expect S&P 500 net margins excluding Financials and Energy will slip from 12.7% in 2021 to 12.6% in 2023, but consensus expects a 30 bp rise to 13.0%”
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I generally do not pay much attention to consumer sentiment because it is backwards looking and prone to rapid reversal. That said, BMO economist Sal Guatieri noted that U.S. consumer sentiment hit an all-time low and that does seem relevant,
“The only news more shocking than the CPI report on Friday was the stunning University of Michigan consumer sentiment survey. It showed the main index plunging 14% in June to all-time lows back to 1952 (yes, even worse than the Great Recession). Along with plunging equity markets, households are worried about record fuel costs and high overall inflation…and not just in the year ahead. Expectations for inflation in the next 5 years popped to 3.3%, the highest average since 2008, when oil prices were $140/barrel. Prior to that, you need to go back to 1996 to see a similar print. For the Fed, a quarter century of inflation-fighting credibility is on the line, raising the risk of much bigger rate hikes and a recession.”
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Ritholtz Wealth Management Director of Research Michael Batnick makes the important point that the S&P 500′s descent into official bear market territory means it becomes a general news story, not just in business and finance,
“And while the [bear market] terminology might not matter to you, it matters to everyone who isn’t reading this because most of the country gets their stock market updates from local or national news outlets, and tonight or tomorrow morning they’ll say, ‘stocks enter a bear market.’ So it doesn’t really matter, but it also kinda does … As I’m typing this, my wife called me and said, ‘I’m at Nordstrom returning clothes because it’s a bear market.’ She was being funny, but she actually said this. She told me it’s all over Facebook and Eyewitness news. ‘Bear market, bear market, bear market. Inflation, inflation, inflation. It’s everywhere.’”
“So Bearish it Hurts” – Irrelevant Investor
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Diversion: “While you weren’t looking, Amazon has been building a property empire” – Bloomberg
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Scott Barlow