A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Earnings revisions, among the most important factors driving equity market returns, continue to weaken according to Morgan Stanley’s U.S. equity strategist Michael Wilson,
“As expected, earnings revision breadth has moved into negative territory but is not negative enough yet to take NTM [next 12 months] EPS down. In the absence of an obvious shock like a recession, companies are slow to guide down. This time should be no different which means stocks can hang around current levels until 2Q earnings season … Real Estate has seen the strongest revisions over the past 4 weeks. Food Beverage & Tobacco, Commercial and Professional Services and Materials have also seen a positive change in revisions. The weakest revisions have come from consumer and tech industry groups. Food & Staples Retailing revisions have collapsed over the past 4 weeks as concerns over cost pressures hit the space. Consumer Discretionary has also seen continued weakness in revisions over the past 4 weeks. This weakness has been driven by Consumer Durables & Apparel and Retailing. Tech Hardware has also seen weakness in revisions breadth … "
Mr. Wilson is calling for a market bottom during second quarter earnings seasons here.
“MS’s Wilson: “stocks can hang around current levels until 2Q earnings season when the next leg lower is likely to begin and end.” – (research excerpt) Twitter
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BofA U.S. quantitative strategist Savita Subramanian warned clients not to try and bottom fish in technology stocks,
“Tech was the best sector by a wide margin over the last decade (+145ppt vs. SP500) but peak liquidity, trough rates, inflation, passive fund volatility/crowding, anti-monopolistic rumblings and near-shoring pressure represent risks. Tech has also historically been the worst performer during stagflation (Exhibit 11). Moreover, cyclical tailwinds are reversing – COVID pulled forward demand and created difficult comps … When is it time to buy Tech? When you stop asking. In the aftermath of the Tech Bubble, it took several years for Tech to bottom, but only after many companies went away, those that were left consolidated capacity, shored up capital, and most importantly, after investors had given up on the sector. Today, that is not the case: screen requests are dominated by “washed out Growth and Tech”, Tech and TMT are still the most overweight sectors, Growth still trades one std. dev. expensive vs. Value. Despite what feels like a violent rotation, Growth still leads by 335ppt since 2008, but over the long haul (back to 1926) Value has outperformed Growth by 3.6ppt per annum”
It is interesting that the requests for stock screens from BofA clients are for ‘cheap’ tech stocks and I think Ms. Subramanian is making key points here, notably that active funds are still overweight the sector. In general terms, it is likely time to move on from tech stocks for a while.
“BofA: “When is it time to buy Tech? When you stop asking”” – (research excerpt) Twitter
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Like Mr. Wilson, Citi strategist Edward Morse appears to be calling a market inflection point in the near-to-mid-term, this time a potential market top for oil,
“We revise up oil prices on a delayed Iran deal and marking 2Q to market, but continue to see a downward trend to prices after a spiky near-term period. Russian oil production and exports continue to be eroded, but reconfigured flows to Asia could mean they don’t fall quite as much. Other supply is still growing, but Iran remains a wildcard. Meanwhile, demand continues to see significant downside risks … We continue to see US crude output growth at +0.7-m b/d in 2022 … +1.3-m b/d crude output in 2023 … Elsewhere, Argentina, Brazil, Canada, Colombia, Guyana, Norway are growing … demand is being eroded on China lockdowns, economic slowdown, and high prices. Gas-to-oil switching could ease going forward, as European and Asian natural gas prices are now back below diesel-equivalent prices”
The amount of Russian oil going to CHina is an under-covered story in my opinion - I don’t have data yet.
“Citi’s Morse sees a near-term peak for oil prices” – (research excerpt) Twitter
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Diversion: " Does Coffee Help You Live Longer? It’s Complicated” – Gizmodo
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Scott Barlow