Thoughts & Observations

good news on inflation is an important first step, many more to go

Summary of thoughts:

• More bounce left in the bear, but margin of safety gone

• Valuation alone a poor reason to buy/sell, but it can define ranges in regimes

• Peak inflation momentum an important first step in healing process

• Crowded positioning will exacerbate moves in a sensitive time of year

• Update on recent ideas

Brief thoughts and observations after a wild couple weeks.  Bottom line, the bear bounce got a second wind from softer inflation print, but chasing S&P 500 at/above 4000 is not likely to be rewarded.  When asked early on, this was a level of interest for Mr. Blonde (here).

Without a doubt, peak inflation momentum is an important and necessary first step to better market conditions, but falling EPS estimates and a Fed still hiking >=50bps increments (+QT) remain stiff headwinds. And we have yet to digest the full effect of financial conditions tightening from the last 6mos.

Establishing the Range

Current NTM EPS is $229, but is falling at a >2% monthly rate (i.e. negative carry) so assume its ~$225 in a month.  S&P 500 found valuation support around 15.5x forward p/e and peaked in mid-Aug at 18.2x.  Those levels result in S&P 500 price range of 3485-4095 (assuming $225 NTM EPS).

Could it go higher? Sure, markets overshoot, but you would need to be confident in either multiple expansion >18x or 2023 EPS >$225 and/or rising.