In yet another interesting week, prominent investment houses are warning that the upswing isn’t likely to last. In the year so far, these kinds of reports have become increasingly accurate.
In a recent report released by Morgan Stanley, the bank’s researchers state that the S&P 500’s constituent earnings are now broadly trending to be negative for Q4:
Interestingly, this outlook changed alongside that of Q3 as previous quarters’ earnings were reported throughout this year:
On the individual consumer level in the US, inflation and the political environment reign as the top 2 concerns, with the concern over inflation rising hard while concerns over political climate are trending downwards:
Inflation isn’t just a top concern among consumers; it’s also the Federal Reserve’s stated top priority. As per a recent JP Morgan report, outlook for higher bond rates across tenors is getting increasingly stronger:
Classical market theory suggests that when bonds look more attractive, money is mopped up from the equity markets and depress forward valuations. As it stands, JP Morgan’s researchers hold the view the “Big Tech” and “Tech” are the most valued while relatively conservative sectors such as healthcare, energy and financials have also been deflating, albeit to a lesser degree:
There were a number of interesting reports from Bank of America over the past week. One report stated that, based on their analysis, economic recovery can be expected to take a year longer than expected:
The bank also notes that the Consumer Price Index has lately been rising after the announcement of new fiscal policies. Thus, inflation will continue to be a major factor in decreasing consumption and also bring pressure onto equity markets.
With the current administration managing to retain its majority in at least one of two US houses of parliament, it’s quite likely that new fiscal policies will continue to put pressure on the CPI. While consumption of services continues to have a strong demand outlook, consumption of goods – which impacts consumer discretionary stocks such as Amazon – has been trending increasingly downward for a while now:
Another report stated that the ETFs based on S&P 500 have seen the largest inflows recently. This is typically a bad sign for equity valuation; since the idea of holding a smaller basket of stocks will deliver larger losses than holding broad market ETFs. ETFs based on large-cap stocks (with many constituents being potentially overvalued) have been witnesses heavy outflows:
To add to the argument that tech stocks are increasingly unattractive, growth-based ETFs have also witnessed while value ETFs have seen net inflows recently:
Healthcare ETFs – which cover a traditionally defensive sector – have been the most attractive among the bank’s clients:
While clients sold ETFs and other flavours of ETFs, they have been heavily buying into fixed income instruments:
Once again, this is a cautionary tale for investors. One the one hand, equity outflows depress stock values – which can be considered a true negative – while a switchover to ETFs creates a slight bump – which is a false positive. So far in 2022, the S&P 500 has seen a reversal of at least 1 percentage point from the day’s high or low on 162 trading days – the most daily u-turns since 2008. With fixed income markets looking better in comparison to long-term holdings in equities in general, this will create increasingly larger numbers of depress/bump cycles. While a longer-term outlook will remain murky, the cycles will create a number of tactical opportunities.
Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500 as well as the upside or the downside to the Nasdaq-100.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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