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Wednesday, Oct. 26, 2022
There are a few places you can go if you need a dose of bullishness, and one of the best is BMO's Brian Belski.
But when I opened his mid-October note, which landed in my inbox, it was filled with a dose of realism. It’s always been very trendy to be a little negative — it makes you sound smart, of course — but when you read it coming from someone like Belski, it feels more like a warning. In this case, there’s a little optimism thrown in.
The gist: He was revising his end of year target for the S&P 500 and earnings-per-share down around 10%, from 4,800 and $245 to 4,300 and $230, respectively. Belski said that his team had underestimated the inflation problems and that with these problems likely to stay for a while, “we decided we need to be more realistic.”
Realistic, however, is relative. The new number — 4,300 is Goldman Sachs’s old number — is now just 3,600. In other words, the “realistic” picture from BMO is actually quite nice, a 17% increase from when he typed it.
“While this is a departure from our longstanding bullishness — we now expect a calendar year loss of roughly 10% — we remain more optimistic than many of our counterparts who seem to be feeding into the negativity with recent revisions,” Belski wrote.
Since that note, the market has gone up almost 5%, and in another note on Monday, Belski revisited the topic to point out a key trend that’s being overlooked.
“At the broader S&P 500 level, we think it is important to note that market P/E [multiple] tends to exhibit moderate…expansion in the months following bear market troughs,” Belski wrote. “With the current bear market price low occurring on 10/12/22, the subsequent 14-month period would roughly bring us to the end of calendar year 2023.”
Belski’s team estimates an expansion of 5.6 multiple points for the P/E ratio, on average in the 14 months after a bear market trough — which Belski says we are either in or will be in very shortly.
This is “something that many investors seem to be missing, based on our client conversations,” Belski noted.
The driver of this change in the P/E ratio? A smaller E, historically speaking.
“On the earnings front, we found that in the 14-month post-bear periods, LTM EPS for S&P 500 companies has declined during seven of the past 11 bear markets with an average change of 2.3% and a median change of -3.7%,” Belski wrote.
This should be somewhat intuitive: earnings go down thanks to bear markets and then an expansion sees prices going up — and a bigger numerator and smaller denominator mean a bigger ratio.
Managing expectations of measured growth
In his mid-October note, Belski also lamented that his peers are “increasingly academic” in their prognostications and that they chose “what we believe are the ‘easy’ and ‘scary’ options,” which Belski says is “fear mongering” that’s “being taken out of context.”
On the contrary, he noted, there’s plenty of historical precedent that economic data should precipitate some “P/E collapse.”
Nothing, Belski continued, has been “textbook” and there’s no reason why that wildcard quality the markets have had should change. “Although we have tempered our enthusiasm, we truly believe that stocks can and should rebound from current levels,” he wrote.
Going forward, however, Belski has added a strong caveat, which, from an optimist, shouldn’t be ignored.
“[The] future trajectory is likely to follow more normalized patterns, a sharp departure from the pandemic stimulus-fueled gains of 2020-21, and the resulting YTD losses that unwound much of that excess,” he wrote.
In other words: despite calling for what would be a 20% Q4, the rocket-ship-like gains we’ve gotten somewhat used to might be in the rear-view mirror. Of course, that might just be a healthy thing, too.
What to Watch Today
7:00 a.m. ET: MBA Mortgage Applications, week ended Oct. 21 (-4.5% during prior week)
8:30 a.m. ET: Advance Goods Trade Balance, September (-$87.5 billion expected, -$87.3 billion during prior month)
8:30 a.m. ET: Wholesale Inventories, month-over-month, September Preliminary (1.1% expected, 1.3% during previous month)
8:30 a.m. ET: Retail Inventories, month-over-month, September (1.2% expected, 1.4% during prior month)
10:00 a.m. ET: New Home Sales NSA, September (580,000 expected, 685,000 during prior month)
10:00 a.m. ET: New Home Sales, month-over-month, September (-15.3% expected, -28.8% during prior month)
Boeing (BA), Boston Scientific (BSX), Bristol Myers Squibb (BMY), Coursera (COUR), Ford Motor (F), General Dynamics (GD), Harley-Davidson (HOG), Hilton Worldwide Holdings (HLT), Kraft Heinz (KHC), Lending Club (LC), Meta Platforms (META), O'Reilly Automotive (ORLY), Spirit Airlines, (SAVE), Thermo Fisher Scientific (TMO), Upwork (UPWK), V.F. Corp (VFC), Wingstop (WING)