Tuesday, November 12, 2019
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It’s all about low expectations
There’s a famous quote attributed to Charlie Munger which says the key to a happy marriage is finding someone with low expectations.
Investors have taken heed.
With the stock market at record highs as we near the end of 2019, a decade that has surprised skeptical investors almost every turn has some analysts questioning what’s next for markets.
With just under 91% of the S&P 500’s market cap having reported earnings for the third quarter, earnings per share are on pace to grow 0.6%, according to data from Credit Suisse’s Jonathan Golub. For the full year, S&P 500 EPS is expected to grow just 0.2% in 2019.
Even with a tough comparison against 2018’s blockbuster earnings that followed corporate tax cuts, this kind of earnings growth still does little to instill confidence in Corporate America.
Third quarter earnings, however, has still been better than feared. As we noted last week, outperformance relative to expectations from companies during third quarter earnings has emboldened investors to price out the 2020 recession that had become widely feared after the summer’s troubling signs from the bond market.
And Nicholas Colas, co-founder of DataTrek Research, sees this year’s market rally as a sign that investors believe better days are ahead. If for no other reason than the bar to clear in 2020 has been lowered significantly after a “no-growth” earnings picture in 2019.
“Markets rallying to new highs clearly indicates that marginal investors believe 2019’s no-growth earnings will make for easy comps in 2020 if the US-China trade war abates,” Colas wrote in a note to clients published Monday.
European and emerging markets recovering, the dollar weakening, and U.S. business confidence improving all seem set to make next year full of upside surprises when it comes to growth and earnings. And indeed, Wall Street now expects S&P 500 to grow 9.9% next year.
“If you’ve ever covered retail or other cyclical equity sectors, you know how powerful the ‘easy comp’ story can be...Unless U.S.-China trade talks hit a large pothole in coming weeks, that’s the narrative that should continue to drive U.S. equity prices higher through the end of the year,” Colas adds.
There are few things in the investing world that are easier to top, expectations-wise, than fears about a full-on economic downturn. But Colas’ reference to the power that “easy comps” offer investors in cyclical sectors should also not be ignored.
Because this is the exact rotation investors have witnessed over the last few months — a rotation out of defensive and momentum names and into value and cyclical stocks. JPMorgan’s Marko Kolanovic first called out this rotation in early September as a driving force for the market and on Friday reiterated his view that this trade is still only beginning.
“Given that investors are heavily overweight defensives and underweight cyclicals...the key question is whether the current rotation from defensives/momentum into value/cyclicals will continue,” Kolanovic wrote Friday.
“We called for this rotation in July, and after an initial August setback, there was a multi-standard deviation rotation in September. Yet, there was broad skepticism at the time that the rotation was just a blip, so we reiterated that it had only begun and by far the largest part of the rotation was still ahead of us.”
“The rotation continued since then and value is now above its September highs. Our view is that this rotation should continue in Q4 and Q1.”
End of the world trades are out, better days ahead trades are in.
And these bets look even better now because of how negative things seemed just a few months ago.
What to watch today
6:00 a.m. ET: NFIB Small Business Optimism, October (102.0 expected, 101.8 in September)
6:30 a.m. ET: Advanced Auto Parts (AAP) is expected to report adjusted earnings of $2.07 per share on revenue of $2.3 billion
6:30 a.m. ET: D.R. Horton (DHI) is expected to report adjusted earnings of $1.25 per share on revenue of $4.9 billion
7:30 a.m. ET: Tyson Foods (TSN) is expected to report adjusted earnings of $1.25 per share on revenue of $11 billion
4:05 p.m. ET: Tilray (TLRY) is expected to report adjusted losses of 30 cents per share on revenue of $48.94 million
4:15 p.m. ET: Skyworks Solutions (SWKS) is expected to report adjusted earnings of $1.50 per share on revenue of $825.29 million
From Yahoo Finance
President Trump will be speaking at The Economic Club of New York. Watch our coverage starting at 12 p.m. ET.
UK employment still near record highs as Brexit and election loom [Yahoo Finance UK]