The risk trade has picked up in the past hour with S&P 500 futures now up 10 points and commodity currencies bouncing back. That follows a remarkable rally late last week and a great start to the year.
The weekly chart of the S&P 500 shows just how pivotal a week it will be and with a host of big-cap earnings reports along with the US PCE report, there are plenty of catalysts.
One of my favourite market sayings is that "there's no one as bearish as a sold-out bull" meaning that people holding a lot of cash desperately want to see the market fall. And there are many people with cash on the sidelines.
That's amplified some of the bears and here's one: Mike Wilson from Morgan Stanley made some great calls on the market last year and is a guy many on Wall Street follow. He's not backing down from a call that stock markets are vulnerable.
Coming into this year, the number one investor concern was that everyone seemed to have the same outlook for US equities - a tough first half followed by a strong finish. Views varied on the degree of the drawdown and magnitude of the rebound, but a majority expected a US recession to begin sooner rather than later. Fast forward just one week, and the consensus view has shifted sharply, particularly regarding the recession. Specifically, while more investors are starting to entertain the idea of a soft landing for the economy, many others have pushed the timing of a recession out to the second half of the year. This change is due in part to China's reopening gaining steam and natural gas prices collapsing in Europe.
While these are valid grounds for investors to modify their views, we think price action has been the main influence. The rally this year has been led by low- quality and heavily shorted stocks. It's also witnessed a strong move in cyclical stocks relative to defensives. This cyclical rotation in particular is convincing investors that they are missing the bottom and must reposition. Truth be told, it has been a powerful shift, but we also recognize that bear markets have a way of fooling everyone before they're done. The final stages of the bear market are always the trickiest, and we have been on high alert for such head fakes, like the rally from October to December we anticipated and traded. In bear markets like last year's, when just about everyone lost money, investors lose confidence. They start to question their processes as the price action and crosscurrents in the data create a hall of mirrors that increases their confusion. This is precisely the time to trust your own work and ignore the noise. Suffice it to say, we're not biting on this recent rally because our work and process are so convincingly bearish on earnings...
Importantly, our earnings call is not predicated on the timing of an economic recession or even whether one occurs this year. Our work shows further erosion in earnings, with the gap between our model and the forward estimates as wide as it's ever been. The last two times our model was this far below consensus, the S&P 500 fell by 34% and 49%. Could our model be wrong? Of course, but given its track record, we don't think it will be wrong directionally, particularly in view of the collection of leading series/models we've published that point to a similar outcome. It's simply a matter of timing and magnitude...and we think the earnings recession is imminent. We find the shift in investor tone supportive of our call for new lows in the S&P 500, which will bring this bear market to a close later this quarter or early in 2Q.
To be more precise, our forecasts are predicated on margin disappointment, and the evidence is mounting. When costs are growing faster than sales, margins.
I think that focus on margins is well-founded given inflation. I'm also less worried about H2 and more worried about 2024 as when we see the real economic slowdown.