INSIGHTS

Stefano Sciacca

Fri, May 1


Month-End Rebalancing & Technical Rebound

As of 27th of April 2020, among the eleven S&P 500 sectors that have already reported numbers, only 4 are expected to show year-over-year earnings per share (EPS) gains for the first quarter of the year. The consumer staples sector is expected to post the largest gain of 4.2% growth on EPS yoy, while Energy has so far declined by 68.4%.

 

 

Earnings deterioration, operating margin contraction, top-line decline, combined with the unprecedented bear market bull-run, purely based on Central Bank money printing, created upside pressure which has pushed the S&P 500 30% off the lows reached on the 23rd of March (at roughly 2200), leading the US stock index to trade at the all-time-high multiples (see “Chart of the week” below). Compared to the 10Y historical average, the SP500 is currently trading at 22x forward PE and 13.3x forward EVEBITDA, meaning 54% and 67% premium, respectively.

 

If business performance and companies valuations still mattered, then despite plunging underlying top-line & bottom-line due to operating leverage mismanagement, decrease in dividends, shares buyback halting, lack in corporate guidance and outlook (causing sell-side analysts not only big headaches, but also greater than usual estimates variance across the vary research houses) and, in case anyone has already forgotten it, two thirds of the world remains under lockdown. With that being said, many might ask what is the catalyst driving the stock market to such a high valuation, given the current economic and financial circumstances?

 

The answer is very simple: the FED. The US central bank is implementing an expansionary monetary policy, by enlarging its balance sheet by roughly 80bn USD a day, which is unprecedented. All this money is flowing into the same pockets of those people who already enriched the most over the past decade. With wealth-gap issues aside, the real problem is that this “risky” asset price distortion/manipulation is increasing the risk of moral hazard. Think of this, why wouldn’t you buy discounted stocks (in absolute terms and by not looking at the multiples) of PROTECTED sectors if the cost of GOVERNMENT-BACKED money if basically zero?

 

At the end of the day, everyone knows the stock market is cyclical but eventually it returns the higher risk premium in the long-term. The focus of investors does not seem to be driven by business fundamentals or idiosyncratic opportunities anymore, but rather by the likelihood of extra “free” money printed by the FED, pushing the stock market even higher and leading investors to realise quick capital gains (sometimes even by investing in loss-making businesses). An investor could make money right now simply by investing at stocks trading below their book value. Is there a deadline for this madness? Perhaps not, but it is a vicious circle and it could potentially cause prolonged pain to middle-class taxpayers.

 

Next week the macro spotlight will be on?

 

Monday:

  • Markit Manufacturing PMI – Eurozone
  • Factory Orders – US

 

Tuesday:

  • Markit Services PMI – UK
  • Balance of trade – US
  • Markit Composite PMI – US
  • ISM Non-Manufacturing PMI – US

 

Wednesday:

  • Caixin Services PMI – China
  • Markit Services PMI – Eurozone
  • Construction PMI – UK
  • ADP Employment Change – US
  • Oil Data – US

 

Thursday:

  • Construction PMI – Eurozone
  • BoE Interest Rate Decision – UK
  • Jobless Claims – US
  • Consumer Credit Change – US

 

Friday:

  • Gfk Consumer Confidence – UK
  • Non-Farm Payrolls – US
  • Unemployment Rate – US

 

Chart of the week

 

  

Tweet of the week

 

“The Fed's policies are poisoning markets and the economy.

But without the Fed’s monumental interventions the system would collapse under its own broken facade.

The system is broken. “

 

Sven Henrich

 

Fact of the week

 

30mn Americans have been laid-off since the COVID-19 pandemic hit the US causing economic disruption and general lockdown.


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