A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief strategist Brian Belski identified three big reasons for the TSX to rally.
“Recessionary Multiples Suggest Strong Price Rebound. While recessionary multiples imply some earnings contraction is likely, our work suggests that the market often overprices these contractions with trough multiples seeing strong price rebounds over the next 12 months as valuations normalize. To be clear, we do not expect an earnings contraction over the next 12 months. In fact, our S&P/TSX 2022 EPS target remains 7% below the bottom-up 2022 EPS estimate, suggesting upside risk to our earnings outlook. Breadth of Market Weakness Is at an Extreme on Indiscriminate Selling: The breadth of companies hitting new 52-week lows and companies hitting new 52-weeks highs is now at extreme levels that is consistent with a strong rebound. From our perspective, this type of indiscriminate selling is another strong contrarian indicator… Another Contrarian Indicator: Cyclical Underperformance Is Now at an Extreme: According to our work, when cyclical sector underperformance reaches these extremes (oversold), the market rebounds by double digits on average 12 months after cyclicals have underperformed more defensive sectors by more than one-standard deviation.”
BofA Securities U.S. quantitative strategist Savita Subramanian slashed her target for the S&P 500 which is now the lowest on Wall Street,
“BofA now forecasts a mild US recession starting in 2H22 … real ‘22 GDP growth of 1.1% (2.3% prior), -0.2% in ‘23 (1.4% prior), and five quarters of negative sequential grth (1Q22-1Q23). The Fed is forecast to hike to 3.25%-3.5% by year-end, then cut from 2H-1H24 to 2.25%-2.5% (vs. hiking through 1H23). BofA rates strategists expect 2.75% on the 10yr by year-end (prior: 3.5%) then 2.5% by end of ‘23 (prior: 3.25%). New S&P 500 year-end target: 3600, lowest on the Street … We lower our year-end target to 3600 from 4500, a 25% decline (31% is the avg. decline amid recessions). In our Fair Value Model (one of five target inputs) we increased the normalized equity risk premium (ERP) by 150bp to 575bp (a 175 trough-to-peak ERP move similar to that of the mild early 90s recession). For our S&P 500 floor assumption, we could see ~3,000-3200 (see linked note) before year end”
See here for a definition of equity risk premium
“BofA: “New S&P 500 year-end target: 3600, lowest on the Street”” – (research excerpt) Twitter
Also from BofA, global quantitative strategist Nigel Tupper was among the first to identify a slowing global economy using his global wave model. The global wave incorporates industrial and consumer confidence, capacity utilization, unemployment, producer prices, credit spreads and earnings revisions. Mr. Tupper published a global wave update on Wednesday,
” The Global Wave has now fallen for eight consecutive months as the downturn in the global cycle continues. Ongoing monetary policy tightening has the potential to weigh on the global cycle in the second half of the year. Also, a falling Global Wave suggests earnings expectations are likely to deteriorate given the strong relationship between the Global Wave and global EPS forecasts YoY over the last 34 years (77% correlation). Global equity markets have de-rated this year, but weakening earnings expectations could drive the next leg down. Confidence and Credit Spreads contributed negatively Falling confidence continues to weigh on the Global Wave. Last month, Industrial Confidence fell in 72% of countries and Consumer Confidence deteriorated in 67% of countries. Additionally, Global Credit Spreads widened meaningfully by 1.5% during the month which weighed heavily on the Global Wave. In contrast, surging Producer Prices and a small uptick in the Global Earnings Revision Ratio contributed positively. Global Capacity Utilisation contributed a slight positive despite falling in 58% of countries.”
“BofA: “The Global Wave suggests earnings could deteriorate”” – (research excerpt) Twitter
Diversion: “What’s the most popular decade for music? This one” – A Journal of Musical Things
Tweet of the Day: “The market now expects bigger Fed rate cuts in the first half of next year as recession sets in” – Twitter
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