Developed Countries
Undoubtedly, the SPX is fully valued trading near an all-time 12-month forward P/E multiple and an all-time high trailing P/S ratio. Correcting the forward P/E multiple for the 5-year forward growth rate and creating an S&P 500 forward P/E/G ratio is revealing. The SPX P/E/G ratio has exploded to 4 standard deviations above the historical mean (using I/B/E/S data back to 1985) with a 2 handle. Not only the jump in the 12-month forward P/E (courtesy of a gap down in EPS) has slingshot the P/E/G ratio to the stratosphere, but also sell-side analysts throwing in the towel in long-term SPX EPS growth projections has contributed to the SPX P/E/G ratio's parabolic rise. Such exuberance is clearly unsustainable. Our sense is that the S&P 500 P/E/G ratio will come back down to earth as the trifecta of rising 12-month EPS estimates, sideways to lower move in the SPX in the near-term and a recovery in the 5-year EPS growth rate, will exert enormous gravitational pull. Bottom Line: We continue to recommend investors keep some powder dry and refrain from deploying capital at the current juncture. A better entry point in the broad equity market will likely materialize in late Q4.
BCA Research's US Bond Strategy service assess the tech stock sell off and its implications on bonds. Bond yields correlate most strongly with: The performance of cyclical equities over defensive equities. The ratio of CRB Raw Industrials over…
Many commentators have quipped that we are not in a V-shaped, nor a U-shaped or W-shaped recovery but a K-shaped one where a few winners are reaping large gains while considerable segments of the economy are under extreme duress. Paradoxically, strong…
In response to the production shutdowns and decreased run rates that have plagued the US and global economy since March, US inventories contracted at their quickest three-month rate since the depth of the Great Financial Crisis. Yet, as the economy re-opens…
August's retail sales print came in weaker than expected at 0.6% month over month, missing expectations of 1% and down from July's revised print of 0.9%. Meanwhile, the retail sales control group actually contracted by 0.1% and failed to meet expectations of…
Overweight We reiterate our recent upgrade to overweight in the S&P materials sector. Since the late-July inception, materials stocks have been steadily climbing and also propelling our cyclicals/defensives portfolio bent. Given the rosy macro outlook more gains are in store. Materials stocks are hyper-sensitive to the global reflation cycle and China’s aggressive stimulus is reverberating across the Pacific. Namely the Chinese are opening up the fiscal and credit taps at a breakneck pace (bottom panel). Already, the economy is responding and has likely returned to the trend growth trajectory observed prior to the pandemic. The Chinese bond and stock markets are heeding the message of the authorities and corroborate that the economic recovery is gaining steam (top panel). All of this suggests that global trade is on the mend and the commodity-laden S&P materials sector remains in the driver’s seat. Bottom Line: Stay overweight the S&P materials index.
BCA Research's Geopolitical Strategy service analyzes the potential consequences of a contested election. The constitutional power to count the Electoral College votes, and to determine the election if the college is indecisive, lies with Congress (and/or…
BCA Research's US Bond Strategy service concludes that without additional household income support from Congress of $500 to $800 billion, consumer spending will massively disappoint expectations over the next 6-12 months. The CARES act played an essential…
An intriguing dichotomy is taking shape in the US economy, one increasingly repeated around the world. The manufacturing sector is recovering smartly from the depth of the COVID-19 recession, but the service sector is having a tougher time healing. This…
Equities started the week off with a jolt on the back of a flurry of M&A deal as “Merger Mondays” is making a comeback, but we remain skeptical that the correction is over and caution investors to resist the temptation to bottom fish. While COVID-19-related uncertainty is dissipating, the quickly approaching election will make sure that volatility remains elevated. Importantly, market internals also suggest that there is likely more downside in the near-term. Trying to quantify the drawdown, we turn over to CBOE’s equity put/call (EPC) ratio. The EPC ratio is nowhere near recent extreme readings. SPX pullbacks since the early-2018 “Volmageddon” have corresponded to significantly higher EPC ratio readings. In the past 10 such iterations, the median EPC ratio has been 0.86, the mean 0.93, with a range of 0.77 to 1.28 (see table on the right). Currently, the EPC ratio is hovering near 0.67 suggesting that downside risks persist (EPC ratio shown inverted, see chart below). Table 1 Bottom Line: Stay patient and refrain from deploying fresh capital in the broad equity market. A better entry point will likely materialize between now and the end of the year.