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A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BofA Securities U.S. quantitative strategist Savita Subramanian offers investing advice in the technology sector that she notes are still “in purgatory,”

“BofA Client Flow data indicate that institutional clients were larger net sellers of Tech stocks in Jan. than in any other month over the past year, but capitulation like selling was far from evident … Tech is one of the few sectors where buyback trends have noticeably slowed … Valuations and alpha have had an asymmetric relationship within the Tech and TMT sectors. Expensive Tech is not a clear cut short, but really inexpensive Tech tends to outperform: high Free Cash Flow to Enterprise Value (top quartile) Tech has produced 5.7ppt p.a. alpha vs. the sector since ‘85. The worst strategy is Tech in the process of derating, which ends up purgatory or “dead money”, and underperforms until rock-bottom valuations are reached … Tech overall is in ‘Growth Purgatory’ rather than “dirt cheap, buy everything” Tech: higher rates, growth disappointments and a COVID-inflection point are being priced in real-time … Buy Tech wholesale when everyone forgets about it Following the Tech Bubble, it took about 10 years for the Tech sector to recover and regain its lead.”


Morgan Stanley’s U.S. equity strategist Michael Wilson provided some ominous observations on earnings growth,

“Our Leading Earnings Indicator which is predicting a meaningful deceleration in EPS growth. [Our analysis] shows that the slowing EPS revisions breadth trend we have been calling for is now in gear. We expect this dynamic to continue at least through 1Q reporting season as companies in aggregate begin to lower the bar on out year earnings expectations amid high costs and to some extent slower than anticipated demand … we are skeptical margins will sustain current levels in the face of record inflation, rising wages, higher commodity costs, and elevated transport costs… The ratio of negative to positive guidance is the highest it has been since mid 2019 with more companies tempering expectations for the first quarter ... Over half of the negative guidance we have seen thus far has come from Tech and Industrials companies ... Real Estate companies have also made up a large proportion of negative guidance at 9% especially considering its weight in the S&P 500 is 2.6%. We expect more negative guidance in the coming weeks especially as retailers report fourth quarter earnings.”


National Bank economist Warren Lovely discusses whether it matters if Canadian and U.S. inflation levels differ significantly,

“Having allowed some dust to settle on Wednesday’s striking (disturbing?) Canadian CPI release, we ask: Do relative inflation rates between Canada and the U.S. matter for interest rate differentials? Based on current yields, you might think the answer is: Not so much. But if North America’s inflation pop proves less-than-fully transitory, cross-market trading will need to increasingly discount inflation differentials (real and expected). We explore how that worked in the old days, appreciating the uniqueness of today’s situation vs. earlier periods … While alarming in its own right, Canada’s inflation surge hasn’t matched what we’ve seen stateside. Canadian inflation is running as much as 2.8%-pts below the U.S., depending on your preferred inflation measure. What does Canada get for this less-extreme inflation backdrop? A scant 4 bp premium on 10-year yields. Despite U.S. prices out-running Canadian equivalents in the past year, Canadas have net underperformed USTs. Maybe markets buy the transitory inflation argument after all? We’re not convinced … . Are foreign investors shunning Canada’s sovereign? Hardly … CPI gaps have possessed little predictive power when it comes to yield differentials.”

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