United States
BCA Research’s Global Fixed Income Strategy service delved into the recent Fed’s Senior Loan Officer Survey (SLOS). The net percent of domestic respondents to the SLOS that tightened standards for commercial and industrial (C&I) loans (measured as an…
In the last week’s Strategy Report we highlighted how the often-heavy-lifting tech sector’s profit growth contribution to calendar 2021 SPX earnings is giving way to other GICS1 industries. Historically, the tech sector commanded the lion’s share of profit explanation for the SPX, but not in 2021. In fact, the S&P IT sector is ranked 4th in terms of contribution to overall SPX profits, behind industrials, financials and consumer discretionary (see chart). Additionally, the tech sector no longer sports an earnings weight similar to its market cap weight as it has run ahead of itself. This is also the case because the rest of the sectors are playing catch up this year as the US economy is slated to reopen on the back of the herculean inoculation efforts (profit weight and mkt cap weight columns, Table 1). In fact, the metric of market cap weight minus the sector’s earnings weight is a rough valuation measure highlighting that tech stocks are 5x to 10x more expensive than their deep cyclical peers (industrials, materials and energy, last column, Table 1). Bottom Line: A broader-based participation in the equity rally is a healthy backdrop for the cyclical return prospects of the SPX. Table 1
Last week, we observed that evidence from the past decade suggests that higher yields are not always a risk to stock prices, as long as the yield increase reflects favorable economic conditions, which also push up the dividend growth rate. Evidence from a…
BCA Research’s US Investment Strategy service concludes that fiscal stimulus may give rise to upward inflation pressures, but not in the near term. Slack in the market for service employees cannot be absorbed before the end of the year and goods disinflation…
European equities lagged US ones throughout the bulk of last year, and continue to do so in 2021. Several factors explain this mediocre performance. The euro’s strength tightened monetary conditions in the euro area and is weighing on corporate…
The preliminary release from the University of Michigan’s Survey of Consumers was a significant disappointment, revealing a large decline in sentiment in February. The headline index fell 2.8 points to 76.2, the lowest since August and significantly below…
Semiconductor equities continue to defy gravity. Semiconductors are a high beta play on the global recovery and the strength of the technology sector. That has made them a prime beneficiary of the reflationary environment that has been crucial to the stocks…
Despite a decline in economic surprises since July, global and US equities continue to power ahead, lifted by record flows. Reflation remains the driving force behind this rally; however, investors should not ignore the many lurking dangers. Reflation is…
Chinese data is waving a red flag as we highlighted in this Monday’s Strategy Report where we also instituted a 2.5% rolling stop to the cyclicals vs. defensives ratio. Not only are the Chinese authorities trying to engineer a slowdown with the recent reverse repo operations, but also BCA’s China Monetary Indicator and the selloff in the Chinese sovereign bond market are all corroborating the economic deceleration signal (top & middle panels). Railway freight (and infrastructure spending) data also highlight that not everything is as rosy as it appears to the naked eye in the Middle Kingdom, giving us even more reasons to worry about the longevity of the US cyclical/defensive bull market run (bottom panel). Finally, the cyclical/defensive ratio is sitting 14% above its 200-day moving average confirming the dual stretched message that our valuation and technical indicators are emitting (not shown). Bottom Line: We put a 2.5% rolling stop on the cyclicals vs. defensives ratio in order to protect gains north of 17% since inception. Should it get triggered, we will downgrade the ratio from overweight to neutral via trimming the niche materials sector to a benchmark allocation. Stay tuned.