Thursday, May 18, 2023

Morning Note: Thank Inflation - And - Not Your Typical Bull Market Setup

A couple of observations on Q1 corporate earnings.

The first being positive, as 68% of S&P 500 members bested analysts sales expectations, while 77% beat on earnings!

The second being positive in terms of actual sales growth (top panel)  but negative in terms of actual earnings growth (bottom panel):

So what gives?

Well, for starters, with regard to the expectations beat, expectations were slashed heading into the quarter.

"Analysts have set the bar lower heading into earnings season by downgrading Q1 estimates. From a guidance perspective, we have seen 81 negative Q1 EPS pre-announcements compared to 26 positives, resulting in a negative/positive ratio of 3.1, which is at a four-year high."

And with regard to positive sales growth vs negative earnings growth, that of course speaks to inflation.

I.e., per Stonex's Vincent Deluarde, all that sales growth came from price increases: 

Again, while we remain open to all possibilities, as I pointed out in yesterday's video commentary -- where we explored the immediate-term conditions that make for rallies the likes of yesterday's -- general conditions are presently inconsistent with what one would expect heading into a new bull market.

In fact, allow me to share a few more visuals to emphasize our point.

Here are all the major equity sectors from January to October 2003... I'm capturing the March bottom of the then bear market and taking it out 7 months... Just note the trend across all sectors:

Here's the same from January 2009 to October 2009, which also captures the then March bear market bottom and takes it out 7 months... Note the similar-to-the-previous-chart look:

And here's July of last year through yesterday, which captures the October pending bottom of the current bear market and takes it out 7 months... Compare the current look to the previous permanent bear market bottoms:

Now let's consider valuations.

SP500 price to earnings ratio... I circled the p/e bottom at previous bear market (including the covid faux bear market) troughs... I also circled the pending last October bottom:  

Same for price to book ratio:

For price to sales ratio:

For market cap to GDP (the Buffett Indicator):

And for the Shiller CAPE (cyclically adjusted price to earnings ratio):

Clearly, history has odds favoring a further cheapening of stocks before the current episode's all said and done.

In other words, and again, while anything's possible, and we need to remain openminded, at this juncture there's not a great deal of support for the notion that we've seen the worst of the present bear market.

Stay tuned...

Asian stocks rallied overnight, with 13 of the 16 markets we track closing higher.

Europe, on the other hand, is mostly red, with all but 2 bourses we follow trading up so far this morning.

US equity averages are mixed to start the session: Dow down 71 points (0.21%), SP500 up 0.02%, SP500 Equal Weight down 0.08%, Nasdaq 100 up 0.48%, Nasdaq Comp up 0.34%, Russell 2000 down 0.16%.

As for yesterday's session, US equity averages closed notably higher: Dow by 1.24%, SP500 up 1.19%, SP500 Equal Weight up 1.27%, Nasdaq 100 up 1.21%, Nasdaq Comp up 1.28%, Russell 2000 up 2.29%.

This morning the VIX sits at 16.90, up 0.18%.

Oil futures are down 1.03%, gold's down 1.13%, silver's down 1.11%, copper futures are down 1.68% and the ag complex (DBA) is down 0.67%.

The 10-year treasury is down (yield up) and the dollar is up 0.59%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 6 -- Albemarle, XLC (communication stocks), Dutch Bros, XLK (tech stocks), VNM (Vietnam equities) and HACK (cyber security stocks) -- are in the green so far this morning... The losers are being led lower by EZA (South Africa equities), XME (base metals miners), DBB (base metals futures), SLV (silver) and GLD (gold).

Tuesday's quote is worth repeating:
"It is absolutely wrong to gamble in stocks the way the average man does." --Jesse Livermore

Have a great day!

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