Wednesday, January 25, 2023

Morning Note: "Earnings Forecasts Remain Too Optimistic"

Folks at BCA Research seem to agree with our near-term thesis. We touched on the below indicators yesterday (LEI), and on Monday (yield curve):

"On a year-on-year basis, the US LEI is now contracting by 7.38%. Year-on-year contractions in this index are a reliable recession indicator, especially when they coincide with an inversion in the 3-month/10-year segment of the yield curve and restrictive monetary policy."

And, like we keep saying with regard to corporate earnings: 

"On balance, the LEI and other recession indicators are likely to continue sending a recessionary signal in the coming months. Meanwhile, aggregate earnings forecasts remain too optimistic and have room to be revised lower."

Hence, the chart we featured in yesterday's note (LEI/CEI ratio in white, SP500 earnings in orange):

I'll say it again, the risk/reward setup for equities right here is simply not inspiring.

Asian stocks were mostly lower overnight, with China shuttered this week for the lunar holiday... Japan, however, once again bucked the trend, with a 0.35% gain on the session.

Europe's getting hammered so far this morning, with 17 of the 19 bourses we follow trading down as I type.

US stocks are lower to start the session: Dow down 233 points (0.69%), SP500 down 1.17%, SP500 Equal Weight down 0.85%, Nasdaq 100 down 2.07%, Nasdaq Comp down 1.95%, Russell 2000 down 1.06%.

The VIX sits at 20.39, up 6.20%.

Oil futures are down 0.56%, gold's down 0.07%, silver's up 0.16%, copper futures are down 0.28% and the ag complex (DBA) is up 0.05%.

The 10-year treasury is up (yield down) and the dollar is down 0.29%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 8 -- led by AT&T, long-term treasuries, Brazil equities, Asia-Pac equities and silver -- are in the green so far this morning. The losers being led lower by Amazon, Dutch Bros, AMD, uranium miners and our tech ETF.

"The illusion of consistency is rooted in both cognitive biases (pervasive misunderstandings about the workings of chance) and motivational biases (the need to believe that we do not make life-and-death decisions whimsically). We should thus expect (a) the frequent emergence of shortfalls between what the public hopes experts can deliver and what experts can deliver; (b) the frequent widening of these shortfalls whenever historical forces increase how desperate people are for guidance but not how skilled experts are at providing it."

--Tetlock, Philip E.. Expert Political Judgment (pp. 43-44). Princeton University Press. Kindle Edition.
And, I'd add -- and how desperate "experts" are to provide it.

Have a great day!

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