I noticed that Japanese EPS has been pretty solid over the past decade. The team over at Verdad has done a lot of work on Japanese value stocks. Was wondering if you had a different view of Japan vs Europe or EM?
relative to europe and EM i favor japan as a cheap cyclical that has done better at growing EPS. i actually have on long japan/short em equity pair. this global cyclical pair performs well during $ strength and takes advantage of japan’s “cheapness”
Thanks for the fresh perspective. I always enjoy your analysis.
I recall that you were recently developing a bias toward being long bonds. Wondering where you are on that with your outlook for things being messy over the next 3 to 4 months?
yes, i have long bonds in the portfolio now...something i've held since early April and take opportunities along the way. my core long is in munis and trade futures (FV and TY) along the way. it fits my view the narrative is shifting from "fed hikes to growth cuts"
I have a question with regards to the equity performance of the US vs Europe over the last 10 years.
As your chart shows, there was almost no earnings growth in Europe and there was a lot of earnings growth in the US. This explains why the performance in both stock markets is so different. If you plot a chart of the relative earnings growth and you put on top the relative performance of the stock markets, you get a very close correlation.
However, if you look at the total return charts of both equity indices, the performance of both indices is almost identical.
How is this possible? There was almost no earnings growth in Europe compared to the US but taking into account dividends, market performance is equal... Can you please explain?
well, the reinvestment of dividends is the simple answer. but it gets alot more complicated when you consider after tax returns...which would be more relevant for most. also, GS in that report is using "worldscope" indices which i'm pretty sure represents all cap indices rather than large cap indices. i wish i could post a chart in this post but substack doesn't allow it....but if i look at MSCI Europe vs. S&P 500 from 1999 to present i get 32.5% and 191.9% price only returns for europe and US, respectively. for total returns i see 175.5% and 350%, respectively for europe and US.
Hi Mr B, "The higher the rise, the harder the fall" seems to really ring true. Just one point, how do you factor in the consumer health in your thoughts? I.e, helicopter money, WFH and restrictions on travel have left many in a robust financial position, that with a raging equity market into late 21.
Is this slow down comparable to previous benchmarks or is consumer health an outlier that could slap this slowdown in the face and spending can stay strong?
I own and manage a SME in the UK, I fully subscribed to the inflation pain and Covid boom to covid bust narrative (within reason), but in our case consumer spending is still really strong, in fact it's still accelerating. We like to think this is in part to due to our savvy business credentials as we deliver on our growth plan but I can't help but be surprised as sales continue to roll in.
Appreciate your thoughts as always, great content.
i hear you on the 'stimmy checks' and the demand support that provided...but since then we've had a significant price shock that has driven real wages into deep negative territory and resulted in demand destruction (i.e. see consumer sentiment surveys).
i think the "consumer health" is misleading b/c many use aggregate consumer stats...but the health of the top 5% is quite different than the bottom 95%. for an economy to work well it requires breadth of activity...and last i checked the top 5% aren't paying the bills for the bottom 95%.
meaningful deceleration in housing activity and rising jobless claims are also indicators that question the "consumer health" thesis. just my 2 cents.
Cheers Mr B, it's hard to argue against consumer stats. Rather, are we right to expect an elongated pain period before we see capitulation due to consumer health being artificially stimulated as part of the Covid boom.
The stats are clear, I'm just not sure if the starting line has been moved vs previous slowdowns.
my base case is not a period of elongated pain akin to 2008-2009. i'm more in the camp of 'boom/bust' cycle as a result of overstimulation leading to above trend demand leading to overproduction and over inventoried that all needs to reset back to trend. a bit like one big 'cash for clunkers' program. along the way there will be causalities, but i agree the conditions are different from an elongated period of household deleveraging.
Great stuff. Appreciate the work. In terms of the S&P where do your estimates have it hitting the bottom? I think many of the large banks projecting over 4000 to end the year are out of their mind...
importantly, we can't be too dogmatic and need to stay open minded, but in my opinion paying 16x forward EPS for a market where fed is still in inflation fighting hike mode and increasingly clear forward EPS estimates are too high is too rich a price to pay. i'd say SPX <=3400 is a reasonable area to take a closer look at long equity risk.
Completely agree. Forward estimates being higher than 230 or whatever the current number is seems crazy to me. Maybe some driven by inflation etc but still 2021 EPS was 197ish and that was the highest ever on record. Now analysts think we are going to beat in a year in which the Fed is tightening into a slowdown?? Feels crazy to me. Thanks again.
Reported earnings and "Estimates" can both become quite a farce. Particularly when reporting companies cease providing their own guidance and leave unplugged analysts who fear being wrong in public. Sales $s, as you note, may be the least manipulatable. Excellent piece, thank you for sharing!
thank you for the feedback. yes...and its become a bit of a numbers game over time w/ analysts giving corporates numbers 'easy' to achieve. in my opinion its hard to judge quality of earnings season on a single benchmark...need to evaluate across multiple fronts.
Really great earnings estimate commentary and data. Analysts have been way behind Mr market and are still too high. But still think we can get relief rally even if est #'s head lower after earnings. Feels like current price is discounting more est cuts anyways. Let's see next week.
Great stuff as usual, thanks for sharing. Coming from macro rates background, it seems clear this is the best shot we're ever gonna get at selling stocks. Right now we have a mega hawkish Fed (and CBs everywhere), turning leading indicators of economic cycle, Europe entering widespread recession, and price level in equities that only seems to reflect higher discount rates.
A few months from now Fed will be pausing the hikes and the game will all be about how to get long before everyone FOMOs back in on expectations of easy money yet again.
So if we can't sell off in the next few weeks on earnings misses and lowered guidance (either because it doesn't really materialize or because it's shrugged off), then I just have to wonder how we actually ever get lower stocks because sentiment/positioning is already so low and retail flows show no sign of capitulation. Instrumental week coming up.
thanks for the feedback negitrage. there's certainly more than one possibility/path and we can't be too dogmatic. i outlined some of the signposts i'll be watching for a durable bottom in equities and suggested the window for such an event could be in Sept-Oct period...of course for it to happen things likely need to get worse first.
I agree. People are clinging to false hopes about earnings. My take is that a market that was one of the three most overvalued in history is not going to have the excesses wrung out of it in only seven months with only a decline of 20%.
institutions (HFs, multi-asset, etc) are bearish and significantly reduced their equity risk by my judgement of the data. various forms of retail/individuals (fed flow of funds, ML private wealth, fund flows, etc) still appear invested.
sentiment/positioning is a necessary but not sufficient factor in my opinion...we still need 'good news' and/or visibility for a durable low to be made. negative sentiment and weak positioning are the kindling for bear market rallies though and can reduce the negative convexity that typically comes from shorts.
people have cited 'bearish sentiment' as a reason to buy risk since Dec'21 based on the low quality AAII survey. a longer look back on sentiment measures shows it can stay bearish for a long period of time...was particularly the case during 1970-80s period when we had some similar conditions. professionals might like macro volatility...but most others don't.
Great work, thank you. How is 1 month earnings revision defined? Is that the revision stat for the past month at any point in time during earnings season?
agree. will be a balancing act between hiking 75bps, staying tough on inflation, but also acknowledging signs of tangible weakness in activity. they said slowdown is a cost of policy benefit to slow inflation...so they are unlikely to react much, but will be relevant to monitor their reaction function on growth data. narrative shifting "from fed hikes to growth cuts"
Thanks Mr. Blonde. Excellent article. I'm going to share on Twitter.
The bond market sees about 1.5% more hikes this year (75bp Jul, 50bp Sep, 25bp late 2022), i.e. it sees 50bps less hikes than the Fed itself. Does 1.5% more in 2022 make sense to you in light of worsening financial conditions?
personally...i think another 150bps is high, but i expect we see more tangible weakness in activity data over the next 3mos including a negative NFP print or two which can give the fed pause. inflation is no doubt important, but historically fed has stopped hiking when unemployment rate ticked up...we'll see if they have the guts to ignore it this cycle.
Great works. Thanks for posting.
I noticed that Japanese EPS has been pretty solid over the past decade. The team over at Verdad has done a lot of work on Japanese value stocks. Was wondering if you had a different view of Japan vs Europe or EM?
Thanks.
relative to europe and EM i favor japan as a cheap cyclical that has done better at growing EPS. i actually have on long japan/short em equity pair. this global cyclical pair performs well during $ strength and takes advantage of japan’s “cheapness”
I astonished that commentary of this caliber is free. Thank you very kindly for making it available.
Thanks for the fresh perspective. I always enjoy your analysis.
I recall that you were recently developing a bias toward being long bonds. Wondering where you are on that with your outlook for things being messy over the next 3 to 4 months?
yes, i have long bonds in the portfolio now...something i've held since early April and take opportunities along the way. my core long is in munis and trade futures (FV and TY) along the way. it fits my view the narrative is shifting from "fed hikes to growth cuts"
https://stuckinthemiddle.substack.com/i/52833218/are-you-gonna-bark-all-day-little-doggie-or-are-you-gonna-bite
Thank you for another great article Mr. Blonde.
I have a question with regards to the equity performance of the US vs Europe over the last 10 years.
As your chart shows, there was almost no earnings growth in Europe and there was a lot of earnings growth in the US. This explains why the performance in both stock markets is so different. If you plot a chart of the relative earnings growth and you put on top the relative performance of the stock markets, you get a very close correlation.
However, if you look at the total return charts of both equity indices, the performance of both indices is almost identical.
(see the chart on page 17 for example of the following report: https://www.goldmansachs.com/insights/pages/top-of-mind/buyback-realities/report.pdf )
How is this possible? There was almost no earnings growth in Europe compared to the US but taking into account dividends, market performance is equal... Can you please explain?
well, the reinvestment of dividends is the simple answer. but it gets alot more complicated when you consider after tax returns...which would be more relevant for most. also, GS in that report is using "worldscope" indices which i'm pretty sure represents all cap indices rather than large cap indices. i wish i could post a chart in this post but substack doesn't allow it....but if i look at MSCI Europe vs. S&P 500 from 1999 to present i get 32.5% and 191.9% price only returns for europe and US, respectively. for total returns i see 175.5% and 350%, respectively for europe and US.
Hi Mr B, "The higher the rise, the harder the fall" seems to really ring true. Just one point, how do you factor in the consumer health in your thoughts? I.e, helicopter money, WFH and restrictions on travel have left many in a robust financial position, that with a raging equity market into late 21.
Is this slow down comparable to previous benchmarks or is consumer health an outlier that could slap this slowdown in the face and spending can stay strong?
I own and manage a SME in the UK, I fully subscribed to the inflation pain and Covid boom to covid bust narrative (within reason), but in our case consumer spending is still really strong, in fact it's still accelerating. We like to think this is in part to due to our savvy business credentials as we deliver on our growth plan but I can't help but be surprised as sales continue to roll in.
Appreciate your thoughts as always, great content.
i hear you on the 'stimmy checks' and the demand support that provided...but since then we've had a significant price shock that has driven real wages into deep negative territory and resulted in demand destruction (i.e. see consumer sentiment surveys).
i think the "consumer health" is misleading b/c many use aggregate consumer stats...but the health of the top 5% is quite different than the bottom 95%. for an economy to work well it requires breadth of activity...and last i checked the top 5% aren't paying the bills for the bottom 95%.
meaningful deceleration in housing activity and rising jobless claims are also indicators that question the "consumer health" thesis. just my 2 cents.
Cheers Mr B, it's hard to argue against consumer stats. Rather, are we right to expect an elongated pain period before we see capitulation due to consumer health being artificially stimulated as part of the Covid boom.
The stats are clear, I'm just not sure if the starting line has been moved vs previous slowdowns.
my base case is not a period of elongated pain akin to 2008-2009. i'm more in the camp of 'boom/bust' cycle as a result of overstimulation leading to above trend demand leading to overproduction and over inventoried that all needs to reset back to trend. a bit like one big 'cash for clunkers' program. along the way there will be causalities, but i agree the conditions are different from an elongated period of household deleveraging.
Great stuff. Appreciate the work. In terms of the S&P where do your estimates have it hitting the bottom? I think many of the large banks projecting over 4000 to end the year are out of their mind...
thanks for feedback david, much appreciated. i summarized what i consider the downside SPX price risk in this note: https://stuckinthemiddle.substack.com/i/60674868/recession-risk-pricing.
importantly, we can't be too dogmatic and need to stay open minded, but in my opinion paying 16x forward EPS for a market where fed is still in inflation fighting hike mode and increasingly clear forward EPS estimates are too high is too rich a price to pay. i'd say SPX <=3400 is a reasonable area to take a closer look at long equity risk.
Completely agree. Forward estimates being higher than 230 or whatever the current number is seems crazy to me. Maybe some driven by inflation etc but still 2021 EPS was 197ish and that was the highest ever on record. Now analysts think we are going to beat in a year in which the Fed is tightening into a slowdown?? Feels crazy to me. Thanks again.
Reported earnings and "Estimates" can both become quite a farce. Particularly when reporting companies cease providing their own guidance and leave unplugged analysts who fear being wrong in public. Sales $s, as you note, may be the least manipulatable. Excellent piece, thank you for sharing!
thank you for the feedback. yes...and its become a bit of a numbers game over time w/ analysts giving corporates numbers 'easy' to achieve. in my opinion its hard to judge quality of earnings season on a single benchmark...need to evaluate across multiple fronts.
A pristine piece of work; how simple smart analysis can be . Congrats & keep the hard work flowing. thank you
thanks bataille...glad you appreciate the work and i appreciate the feedback
Really great earnings estimate commentary and data. Analysts have been way behind Mr market and are still too high. But still think we can get relief rally even if est #'s head lower after earnings. Feels like current price is discounting more est cuts anyways. Let's see next week.
Great stuff as usual, thanks for sharing. Coming from macro rates background, it seems clear this is the best shot we're ever gonna get at selling stocks. Right now we have a mega hawkish Fed (and CBs everywhere), turning leading indicators of economic cycle, Europe entering widespread recession, and price level in equities that only seems to reflect higher discount rates.
A few months from now Fed will be pausing the hikes and the game will all be about how to get long before everyone FOMOs back in on expectations of easy money yet again.
So if we can't sell off in the next few weeks on earnings misses and lowered guidance (either because it doesn't really materialize or because it's shrugged off), then I just have to wonder how we actually ever get lower stocks because sentiment/positioning is already so low and retail flows show no sign of capitulation. Instrumental week coming up.
thanks for the feedback negitrage. there's certainly more than one possibility/path and we can't be too dogmatic. i outlined some of the signposts i'll be watching for a durable bottom in equities and suggested the window for such an event could be in Sept-Oct period...of course for it to happen things likely need to get worse first.
https://stuckinthemiddle.substack.com/i/63917622/wen-moon-spx
I agree. People are clinging to false hopes about earnings. My take is that a market that was one of the three most overvalued in history is not going to have the excesses wrung out of it in only seven months with only a decline of 20%.
Really good stuff. With a big earnings week and what will clearly be a hawkish Fed, this week certainly sets up poorly.
thanks for reading and the feedback richard. we are also at a point of the year where 3mo forward returns are seasonally weakest....https://stuckinthemiddle.substack.com/i/63917622/wen-moon-spx
Do you get the sense that people you know are as bearish and negatively positioned as the surveys suggest? Or are people fully invested bears?
institutions (HFs, multi-asset, etc) are bearish and significantly reduced their equity risk by my judgement of the data. various forms of retail/individuals (fed flow of funds, ML private wealth, fund flows, etc) still appear invested.
sentiment/positioning is a necessary but not sufficient factor in my opinion...we still need 'good news' and/or visibility for a durable low to be made. negative sentiment and weak positioning are the kindling for bear market rallies though and can reduce the negative convexity that typically comes from shorts.
people have cited 'bearish sentiment' as a reason to buy risk since Dec'21 based on the low quality AAII survey. a longer look back on sentiment measures shows it can stay bearish for a long period of time...was particularly the case during 1970-80s period when we had some similar conditions. professionals might like macro volatility...but most others don't.
https://twitter.com/MrBlonde_macro/status/1500557657278611458?s=20&t=zfIeZyysMNuShvIc3IKQ1A
Great work, thank you. How is 1 month earnings revision defined? Is that the revision stat for the past month at any point in time during earnings season?
yes...1mo represents the window period used to evaluate revisions (i.e. studies all revisions made in the past 1mo)
Great work. Thank you. Feels like the fed rhetoric Wednesday will be a summer sentiment driver.
agree. will be a balancing act between hiking 75bps, staying tough on inflation, but also acknowledging signs of tangible weakness in activity. they said slowdown is a cost of policy benefit to slow inflation...so they are unlikely to react much, but will be relevant to monitor their reaction function on growth data. narrative shifting "from fed hikes to growth cuts"
Thanks Mr. Blonde. Excellent article. I'm going to share on Twitter.
The bond market sees about 1.5% more hikes this year (75bp Jul, 50bp Sep, 25bp late 2022), i.e. it sees 50bps less hikes than the Fed itself. Does 1.5% more in 2022 make sense to you in light of worsening financial conditions?
personally...i think another 150bps is high, but i expect we see more tangible weakness in activity data over the next 3mos including a negative NFP print or two which can give the fed pause. inflation is no doubt important, but historically fed has stopped hiking when unemployment rate ticked up...we'll see if they have the guts to ignore it this cycle.