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Earnings Crumbling, Wall Street Says Buy Stocks Now

Earnings Crumbling, Wall Street Says Buy Stocks Now - Earnings cartoon 11.03.2015

 

Wall Street's pie-eyed enthusiasm to "buy stocks now" was made even more palpable yesterday. According to FactSet, the average analyst's bottom-up S&P 500 target price for the year ahead was 2256.59. That implies 10.5% upside from yesterday's close. Meanwhile, analysts have been pulling back their expectations for Q1 S&P 500 earnings and Reuters reports "weak earnings expectations sets [the] stage for stock gains." 

 

Delusional?

 

Yes.

 

First off, just consider the accuracy of that 2256.59 bottom-up S&P 500 target. Here's FactSet:

 

"The average difference between the bottom-up target price estimate at the end of the month one year ago and the final price for the index at the end of the same month one year later has been +6.8%. In other words, industry analysts on average have overestimated the final price of the index by 6.8% at the end of each month during the previous year."

 

The reason for the serial over-optimism? Sell side analysts have been perennially bullish. Remember: "Of the 11,584 ratings on S&P 500 companies at the end of the first quarter (March 31), 50.8% were Buy ratings, 43.8% were Hold ratings, and 5.4% were Sell ratings."

 

This while analysts have, in fact, begun ratcheting back their earnings expectations for Q1 2016. According to FactSet:

 

"During the first quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 9.6% (to $26.32 from $29.13) during this period." 

 

That was the largest drop for a quarter since Q1 2009. 

 

And yet the latest bit of permabull storytelling suggests that falling earnings expectations will send stocks higher, as companies beat those dismal expectations. 

 

Earnings Crumbling, Wall Street Says Buy Stocks Now - reuters earnings

 

That argument doesn't hold water. What this bullish interpretation doesn't account for is that all S&P 500 sectors are bumping up against tough comps in Q1 and Q2 of 2016. For our take on this, watch Hedgeye CEO Keith McCullough in the video below:

 


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A Brief Appraisal Of Fed False Narratives

Takeaway: Recent macro market moves in the Long Bond contradict the Fed's "all is good" narrative.

A Brief Appraisal Of Fed False Narratives - Fed ducks in a row

 

Hurray! No recession, no bubbles and the Fed's December rate hike went exactly as planned.

 

That's the latest delusional takeaway from Fed head Janet Yellen. Last night, Yellen joined her predecessors Ben Bernanke, Alan Greenspan and Paul Volcker in NYC for a panel discussion to parade the U.S. economy's "tremendous progress" since the '07-'09 financial crisis.  

 

Where do we begin?

 

We've been steadfast in our criticism of the Fed's and Wall Street's serial overoptimism on U.S. economic growth. Here's Hedgeye CEO Keith McCullough, in the video below, explaining what we really think about Fed "data dependence."

 

 

Last night, Yellen's storytelling hit an all-time low. Here's analysis from McCullough in a note sent to subscribers earlier this morning: 

 

"Yellen has had quite the year of storytelling so far, but last night’s USD comment took the cake: “higher currency was a drag on the economy and consumer spending.” Wow. #StrongDollar (rising purchasing power, falling gas prices, etc.) perpetuated a 6yr cycle high in Real Consumer Spending in 2015; in Q1 Consumer Spending slowed alongside a weakening USD."

 

 

Another issue for the Yellen "all is good" narrative is the continually falling Long Bond (i.e. U.S. growth is slowing):

 

"Another great day for the Long Bond yesterday (best way to be long #GrowthSlowing); 10yr Yield of 1.71% is re-testing the FEB lows as Yellen tries to keep Oil/Commodities/Inflation higher. The Cycle call remains firmly intact; US Equity Beta (like at OCT and DEC end) is behind the curve pricing in what should be the worst quarter of the slow-down (Q2)."

 

 

Fading the Fed's false narratives has been a winning strategy all year.

 

Stick with it.


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CHART OF THE DAY: Dear Janet, The Cycle Is Not Complicated

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 

 

"... As Yellen and her colleagues who now read @Hedgeye Macro can see in today’s Chart of The Day (slide 12 of the Q2 Macro Themes deck), #TheCycle is not a mystery. This one has been both obvious and pedestrian in its sequence:

  1. Q2 2014 = Income Growth, Corporate Profits, and S&P 500 Margins #peaked (in rate of change terms)
  2. 1H 2015 = Employment & Consumption Growth, Confidence, Domestic Investment, and Multiples #peaked
  3. Q2/Q3 2015 = US Equities Peaked
  4. Q4 2015 = M&A #Peaked and the #CreditCycle (and market dislocations) began
  5. 1H 2016 = #GrowthSlowing from #TheCycle peak (in rate of change terms) continues"

 

CHART OF THE DAY: Dear Janet, The Cycle Is Not Complicated - 04.08.16 chart


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Potomac Energy Policy analyst Joe McMonigle discusses his expectations on an OPEC/Russia production freeze and the outlook for oil prices with Hedgeye Macro analyst Ben Ryan.


Cartoon of the Day: A Crude Joke

Cartoon of the Day: A Crude Joke - Oil cartoon 04.07.2016

 

No follow through on yesterday's 5.1% pop in oil prices. WTI back down today. 


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