Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA U.S. quantitative strategist Savita Subramanian, my go-to source on U.S. earnings seasons coverage, says it’s too early to celebrate about strong profit results so far,
“279 S&P 500 companies comprising 71% of index earnings have reported. 2Q EPS is tracking a solid 3% beat at $56.87 vs. consensus $55.35, while 2H EPS has been revised down 2% since July 1. Overall, results were better than feared, especially with more above-consensus guidance than below, which was the biggest positive surprise. But we are still in the very early innings of downturn and estimate cuts. Moreover, only 60% of Consumer Discretionary earnings have been reported, the sector under pressure the most. Continued strength in the USD (+15% YoY so far in 3Q vs. +13% in 2Q) also remains a headwind. Rewards for beats have been more muted, while misses were penalized similar to the historical average … Today, estimate cuts are just starting and fwd EPS is still up 7% since the market peak. Our bull market signposts also indicate it’s premature to call a bottom: historical market bottoms were accompanied by over 80% of these indicators being triggered vs. just 30% currently. Moreover, bear markets always ended after the Fed cut, which likely is at least six months away”
“BofA: " bear markets always ended after the Fed cut”” – (research excerpt) Twitter
As far as I’m aware, Wells Fargo’s Christopher Harvey is the only strategist arguing that the market has returned to favouring the growth stocks that outperformed before the pandemic,
“For the 34 (of 57) Pure Growth reports so far, the average 1-day post-announcement relative return (vs. SPX) was +59bps, with Beats +62bps and Misses +50bps. For the 62 (of 120) Pure Value reporters, the overall figure is -59bps, with Beats -12bps and Misses -259bps. Pure Growth stocks only need to report to be rewarded, as both Beats and Misses outperformed. Pure Value stocks were the Charlie Brown of the reporting season with both Beats and Misses underperforming the SPX. These numbers support our view that we are now in a Growth market. Pure Growth names that missed estimates but still outperformed the SPX by more than 5% were AMZN (+1,036bps vs. 143bps SPX, 7/29); ALGN (+748bps vs. 123bps, 7/28);ETSY (986bps vs. 123bps, 7/28); and GOOGL (766bps vs. 262bps, 7/27). These names have been Pure Growth stocks since pre-pandemic, except for late-comer ETSY, which joined in 2020. These stocks were also contrarian—i.e., they significantly underperformed the market (by 10% or more) in the last 12mo pre-announcement. This implies Growth stocks, which struggled in the rising-rate and inflationary environment, now are seeing a relief rally spurred by “not-as-bad” reports as well as a decline in treasury yields.”
“Wells Fargo: Markets returning to pre-pandemic growth stock winners?” – (research excerpt) Twitter
Morgan Stanley U.S. equity strategist Michael Wilson believes the July rally was caused by the Federal Reserve re-gaining credibility,
“The Fed swiftly pivoted to its most hawkish policy action since the 1980s. It hasn’t gone unnoticed by markets. Since peaking in June, 10-year Treasuries have had one of their largest rallies in history, with the 10s-2s curve inverting by as much as 33bps. Perhaps most importantly, inflation expectations have come down significantly. Objectively speaking, it appears as though the bond market has quickly turned from a vigilante to a believer the Fed will get inflation under control … While the bond market is starting to assume they get inflation under control, it may come with a heavier cost than normal, potentially a recession while they are still tightening, which may leave a very small window for stocks to work before earnings surprise on the downside. As discussed last week, we think that window is now but it can shut quickly. Risk reward is poor after the recent rally so trade accordingly as time may be running out.
“MS: “the Fed has quickly regained its credibility and that’s good for bonds, not stocks.” – (research excerpt) Twitter
Diversion: “The Age of Brain-Computer Interfaces Is on the Horizon” – Wired
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