Stefano Sciacca

Fri, Apr 17

Earnings Season Starts, Bull Run Continues

Whilst Bank of America reported its usual quarterly Fund Manager Survey highlighting active management positioning, JPMorgan and the other banks kicked off what could be the most “feared” and priced-in earnings season ever. BAML’s research team showed the portfolio exposure on cash had increased to the record highs of 5.9% (up from 5.1% in March), whereas 93% of surveyed fund managers expect a global recession to hit by the end of this year, leading to the lowest asset allocation to equity since the March 2009 bottom.


So, how did the market respond to this? With a further weekly rally. Frankly, the stock market seems to be utterly confused due to the many variables that is trying to price in (Oil, Covid-19, US-China propaganda, Vaccine developments and so on). The SP500 has been trading above 2500 for quite a while now, but on the other hand seems also reluctant to finally take off and reach new highs (3000?). Sectors wise, airlines, industrials, consumer cyclicals, semis are all extremely volatile with deep swings upside down depending on the overall market direction. Overall speaking, with 21mn US citizens applying jobless claims there is no sell-side house forecasting positive economic growth for another 1-2 quarters, the SP500 hit a total market capitalisation of $28tn, or more than 1.3x the current (and not downwards revised) US GDP.


Maybe FOMO traders (“Fear Of Missing Out”) along with algo-driven strategies and the unprecedented asset price distortion caused by the FED, have finally made sure the equity capital markets do not reflect their respective underlying economy anymore. What is coming out as a strong and unusual relationship is the positive correlation between OIL and the stock market. In normal conditions, there should be “neutral” correlation, but in times of oil demand/supply shocks, like we have already seen, the stock market can be driven by oil price catalysts (such as last Sunday 9.7mn barrels per day agreement). In other words, the correlation becomes cyclical as OIL is of course a major inflation driver, but also dictates the future of big oil & gas (mining) and energy companies, typically high-leverage, high-CAPEX, high-operating leverage and low margin enterprises whose boards are largely politicised.


JPMorgan posted a very interesting slide within its results presentation about economic and financial activity in March, the month where all major countries initiated their lockdown. As the chart below clearly shows, the biggest US bank has reported a dramatic drop in debit and credit card sales, leading to a record reserve build up at $3.8bn in credit card as a huge wave of delinquencies is likely expected. March has also been the month of a huge amount of Investment Grade-rated bonds issued, circa $187bn (vs $90bn and $105bn in February and January, respectively), meaning the FED’s promise to buy anything in the fixed income space is actually pushing companies to increase their current leveraged positions. Let’s not forget that the above-mentioned debt is ALL USD-denominated, increasing what was already the highest amount of USD-denominated corporate debt. This partially caused the shortage (and rally) of the US Dollar during the phase 1 sell-off in March, as USD-debt issuers (debt=liability) could not liquidate their local currency-denominated assets to pay their principal amount and interest, eroding both income statement and balance sheet. Then, the FED decided to shoot the BAZOOKA and the outcome has been partially offset.


The SP500 is currently trading at 20% premium on EVSALES and 35% premium on EVEBITDA, meaning there is further room for derating. Let’s see how the earnings season go and how bad corporates’ guidance will be.



Next week our macro spotlight will be on?


  • PPI – Ger
  • Chicago Fed National Activity Index - US


  • Unemployment Rate – UK
  • ZEW Economic Sentiment – Ger, Eurozone
  • Retail Sales – US
  • Existing Home Sales – US


  • Inflation Rate – UK
  • Retail Price Index – UK
  • Government Budget to GDP – Eurozone
  • House Price Index – US
  • Consumer Confidence Index – Eurozone
  • Oil Production Data - US


  • Service PMI – Japan
  • Retail Sales – UK
  • GfK Consumer Confidence – Ger
  • Manufacturing PMI – Ger, Fr, Eurozone, UK, US
  • Jobless Claims – US
  • New Home Sales – US


  • Ifo Business Climate – Ger
  • Durable Goods Orders – US
  • Michigan Consumer Expectations – US


Chart of the week



Tweet of the week

“Poverty in the U.S. may reach the highest level in half a century, according to researchers at Columbia University, and the rise is likely to affect black Americans and children the most “

The New York Times


Fact of the week