Earnings: are positive surprises over?
We have entered one of the most difficult earning seasons ever
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Time to talk about markets!
The rebound in the secod half of March it has already been forgotten by the market. The principal equity indices are going down again, and the bond yields have reached very high level.
Despite a lower than expected core CPI data in U.S., the market still believes that the Fed will be super-hawkish. Investors are now pricing ten 25 bps rate hikes within February 2023.
BofA: the long Treasury Trade
Recently the Bank of America strategist team posted a note in which they suggest to go long on U.S. Treasury.
The team believe that we already saw the inflation peak, and the market will soon go out from the current panic level on bonds. They see Treasury to go back at 2.25% (with a stop loss at 3.1%).
A reasonable trade or not? I think it is an interesting one.
Earnings: the moment of truth?
In the last few weeks there have been a lot of earnings revisions, mostly to the down side.
Basically this means that analysts are starting to believe that a lower global economic growth will weigh on company earnings: the reasons can be multiple. For example, the war in Ukraine, the new lockdown in China, the supply chain bottlenecks, the super-high inflation.
How are earnings going so far? Not in an exciting way.
For now, only 15% of the S&P 500 companies has posted its quarterly earnings, but so far the results have not been brilliant. The beat rate is the lowest since Q1 2020, both on earnings and revenue. You can see more details below:
This is not a great signal, because despite low expectations, results are not surprising in a good way the market. If you consider that many multiples, like P/E, are still higher than the average of the last 10 years, there is a concrete risk to see further re-rating to the downside, and more pain for stocks.
Where to invest now?
This is a very hard question, because markets look like a trap right now. Just think that both bonds and stocks area going down, and cash is not a very hot alternative, considering the stellar inflation.
Probably this is a time to stay defensive and diversified.
Don’t put all your eggs (money) in a few stocks. In case of missed earnings the reaction on the single name can be brutal. Just look at Netflix!
Talking about equities I think that this is the right time to stay on large caps, and to hold stocks related to different sectors: even if apparently low attractive, consumer staples can be a great way to defend your portfolio, together with health care and energy. Tech stocks have been hammered, but I see several opportunities coming, on some quality names.
Quality is very important now: higher rates will weight on companies with higher debt. I would prefer to buy companies with high growth and a low NFP/Ebitda multiple, for example.
Finally I see a buy opportunity on bonds, and I will continue to build a position on some bond ETF, like TLT and LQD. I prefer to stay on governemnt and investment grade bonds right now, not on High yield.
Have a great weekend!
Market Radar
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