First signals of a recovery? What the Street thinks
New thoughts of the main guys in the Street
Wall Street chiefs on the US economy:
BofA's Moynihan: Consumers are spending, they have money, they are employed and they have good credit;
JPM's Dimon: Consumers are in very good shape, companies are in very good shape;
Citi's Fraser: The US economy remains relatively resilient.
On inflation outlook:
“We see signs that moderating inflation is already underway and that this cooling will become more prominent over time. Overall, we think headline CPI inflation cools to 6.8% in December and then to 3.2% by September”.
On cutting 2023 SPX EPS numbers:
"We are revising down 2023 EPS by US$ 15 to US$ 225 (consensus US$ 239.80), which implies flat earnings growth for next year. The lagged effects of monetary policy, tighter financial conditions, lower savings, and elevated geopolitical risks suggest slower revenue growth next year due on lower demand and pricing (3% vs. consensus of 5% and CPI of 4%). If the timeline of the recession is earlier and deeper, S&P 500 EPS could collapse to US$ 200 or lower if the contraction is accompanied by a deflationary spiral and private credit cycle".
Marko Kolanovic is trimming the size of his equity overweight and bond underweight allocations in the bank’s model portfolio, citing increasing risks around central bank policies and geopolitics. Kolanovic, who has been Wall Street’s most vocal bull this year, said he’s sticking with a pro-risk stance overall with growth expected to recover in Asia and bearish investor positioning limiting further declines in stocks. Kolanovic, JPMorgan’s chief global markets strategist, wrote in a note to clients late on Monday (Bloomberg):
“We expect the global expansion to continue to display resilience through the middle of next year given an unwind of adverse supply shocks, a material slowing in inflation, and a healthy private sector”.
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Morgan Stanley - Wilson is also on the "bounce train"
Mike Wilson thinks inflation has peaked and could fall rapidly next year as comps get tougher and consumer discounting ramps up. Prior earnings recessions have taken 15 months to play out. While it feels like this downward EPS revision cycle has been in process for a long time, we're only about 3 months in from the early July peak in numbers. We've seen the market multiple discount the earnings downside somewhere between around 40-50% of the way through the EPS compression. All in all, history points to the next 3-4 months as the window to fully discount the earnings recession. He sees this as short term supportive for stocks, until we hit earnings revisions/a full blown recession, and expects a short-term rally in US markets. Morgan Stanley's Mike Wilson said he “would not rule out” the S&P rising to about 4,150, suggesting 16% upside from its latest close, in a technical rally. Ultimately, however, he sees the S&P bear market bottoming around 3,000-3,200. Bloomberg
Goldman Sachs - Q3 has started just fine
"Three of the S&P 500's top 25 (by market cap) stocks reported last week and all three came in just fine - suggesting that Corporate America may be as resilient as the US consumer. Healthcare bellwether UNH is up almost 2% on the week following Friday morning's beat-and-raise results. And the country's largest bank, JPM is up 5%+ for the week as it also reported strong results as it built its capital base at just the right time. And finally, beverage and salty snacks giant PEP is also up 5%+ for the week following Thursday morning's beat-and-raise results. Earnings season has only just started but it is encouraging to see that 3 of the largest companies in the country across three disparate sectors have so far not seen profits materially impacted by everything that has taken place so far this year".
While GS expects European earnings NOT to hold up. GS strategists expect a 10% drop in EPS for the STOXX 600 in 2023.
Investors should sell S&P 500 Index calls and fund buying of the same options on the Hang Seng China Enterprises Index to position for a likely catch-up in battered China-related assets. Bloomberg
“Sentiment on China-exposed assets has remained subdued this year and did not mirror the risk appetite rebound during the summer”.
Brian Garret points out a few important facts regarding the latest price action:
last week's net selling was huge "largest since mid-June, driven by short sells vs long buys at 5:1 ratio".
upside crash showing upside call implied moving sharply higher.
the crowd is short and had bought long calls for the upside crash risk scenario, but " it is likely that a lot of those expired last Friday (on the lows) and need to be redeployed".
TICK index printed highest levels ever.
call volumes as percent of total are exploding.
Bank of America
BofA survey ‘screams’ capitulation with rally set for early 2023. The sentiment on stocks and global growth among fund managers surveyed by Bank of America Corp. shows full capitulation, opening the way to an equities rally in 2023. The bank’s monthly global fund manager survey “screams macro capitulation, investor capitulation, start of policy capitulation,” strategists led by Michael Hartnett wrote in a note on Tuesday. They expect stocks to bottom in the first half of 2023 after the Federal Reserve finally pivots away from raising interest rates. “Market liquidity has deteriorated significantly,” the strategists said, noting that investors have 6.3% of their portfolios in cash, the highest since April 2001, and that a net 49% of participants are underweight equities.
Bill Gross slammed the "total return" bond funds he once popularized. The Pimco co-founder singled out his old firm's product as well as Jeffrey Gundlach's DoubleLine Total Return Bond Fund, which have lost almost 17% and 14%, respectively, this year. Investors were "misled" when they chose these funds for their 401K retirement accounts, "believing that they will produce a defensive return in times of stress."
EV - Sanford Bernstein discusses the path to margin parity for OEM electric vehicles. Legacy OEM BEV gross margins are up to 700bps below ICE models. In contrast, BEV-first OEMs who are ahead on the cost curve (such as Tesla, NIO and Li Auto) see gross margins at or beyond the c. 20% margins enjoyed by existing ICE vehicles. The challenge is that swapping drive-trains increases costs by 40-50%. The battery alone is 70-80% of the additional c.€6k cost. It is easier to reach margin parity on an expensive EV as the share of battery cost are relatively lower on large, expensive cars.