Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi chief U.S. equity strategist Tobias Levkovich warned clients of sharply fading earnings growth,
“Capital equipment bookings generate forecasting ability on earnings patterns and the data appears to confirm a coming slowdown for S&P 500 EPS comps. To be fair, 2Q21 already is anticipated to produce powerful year-over-year profit expansion given the pandemic’s drag last year. But, one need consider the significant plausibility of meaningful corporate tax increases in 2022 complicating the equation and it is not yet being built into projections … Our margin lead indicator already hints at coming profitability problems and the inability to sustain such extraordinary order strength suggests that the earnings picture could fade sharply. Hence, share prices may face heightened volatility particularly when valuations are no longer attractive and complacent sentiment is noticeable in many corners. The words “caveat emptor” look appropriate at this juncture.”
“@SBarlow_ROB Citi: Slowdown in durable goods orders implies “earnings picture could fade sharply”” – (research excerpt) Twitter
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Morgan Stanley U.S. interest rate strategist Guneet Dhingra believes that lower yields are only temporary in what was likely the most important research report over the long weekend,
“We think that 10-year yields are too low versus our fair value estimate at ~1.60%, in large part due to positioning unwinds in recent weeks that have magnified the impact of negative COVID-19 headlines. In our view, yields do not appropriately reflect the strong US economy, or the Fed’s stance. With cleaner market positioning, our economists’ expectations for strong labor market and inflation data, and our base case for a deficit-funded infrastructure package, we see yields rising in the coming weeks… As 10-year yields fell last month, open interest – i.e., the number of open trades on 10-year Treasury futures – declined. This tells us that investors were not adding new positions based on a re-rating of the economy, or concerns about the Delta variant. Instead, they have been unwinding unprofitable older trades … We think that it is important to avoid the trap of forcibly fitting a narrative to lower yields … Currently, 10-year yields imply that markets see the first rate hike in March 2023, and a pace of ~1.5 rate hikes per year thereafter. We think that this implied pace is too low.”
“@SBarlow_ROB MS: “We think that it is important to avoid the trap of forcibly fitting a narrative to lower yields, a trap investors dealt with merely four months ago” – (research excerpt) Twitter
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Goldman Sachs chief U.S. equity strategist David Kostin, in recognition of uncertainty, recommends stocks representing the highest quality balance sheets,
“Our economists maintain their view that the Fed will first hint that it intends to decrease the size of its $120 billion monthly asset purchases at its September meeting, formally announce tapering in December, and begin tapering in early 2022. In 2013, Fed Chair Bernanke’s comments about tapering catalyzed a five-day, 40 bp backup in 10-year yields and a 5% drop in the S&P 500. Ultimately, the selloff proved temporary; the S&P 500 returned 32% in 2013, with Growth stocks outperforming following the taper tantrum. Amid uncertainty around tapering, Fed rate hikes, and economic growth, high-quality strategies like our Strong Balance Sheet basket have recently outperformed.”
Mr. Kostin posted his strong balance sheet basket of U.S. stocks to provide potential investment ideas. Prominent names among the extended table include, Facebook Inc., Alphabet Inc., Take Two Interactive Software, Garmin Ltd., Home Depot Inc., Amazon.com Inc., Monster Beverage, Costco Wholesale, Colgate-Palmolive, Intuitive Surgical, Edwards Lifesciences, Illumina Inc., Rollins Inc., NVIDIA Corp., Intuit Inc., Adobe Inc., Mastercard Inc. and Air Products and Chemicals.
“@SBarlow_ROB GS strong balance sheet basket” – (research excerpt) Twitter
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Diversion: “‘Network effects should be classified as “uninvented public goods’” – Interfluidity
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Scott Barlow