Estimate Breadth

Friday, July 8th, 2022

The raw data look reassuring but the trends aren’t

The percentage of companies in the S&P500 with no drawdown in their earnings estimates is declining and just about to drop below its median for the last 15 years. The percentage where there is a drawdown of more than 20% is about to start rising, but from a low level. We are still within normal ranges on both measures, but if they move out of this, the downside is significant and the recovery takes much longer than the decline. At the sector level, we cannot make sense of the relative rankings in several cases. In particular, we think the consensus is far too optimistic about the outlook for Industrials.

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Lower for Longer

Friday, June 24th, 2022

New worst-case scenario for US Equities

We have cut our reasonable worst-case estimate of where the S&P500 may bottom from 3,400 to 3,000. This follows on from our last note which argued that current consensus earnings were likely to drop by at least 15% before hitting their trough sometime in 2023. Our new target implies a forward pe ratio of about 15x, which is slightly lower than the median for this century.  As consensus forecasts are reduced, we expect the earnings mix to move away from highly-valued sectors like Tech and Consumer Discretionary towards lowly-valued sectors like Energy and Materials. The other reason for our new target is that nobody has any profits from other investments which they can reinvest into equities. US 7-10 Treasuries are down by about 17% since the equity market peaked, compared with gains of about 10% at the equivalent stage of the bear markets in 2001 and 2008.

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How Earnings Recessions Behave

Friday, June 10th, 2022

Consensus estimates aren’t reliable in a bear market

Bear markets can make the most rational of investment approaches look pretty stupid. Any concept of fair value based on consensus estimates can be downright dangerous. The typical delay between the peak in the index and the peak in estimates is more than 30 weeks, so we should not expect the consensus to start cutting until late August.  The typical drawdown in 12-month forward estimates lasts between 115 and 170 weeks. So, the estimates you are using for 2022/23 may also be the numbers for 2025/26.

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Europe Has Second Thoughts

Friday, March 12th, 2021

Earnings estimates need to be revised down

We have started to apply our probability approach to consensus earnings estimates. For Europe ex UK, we cover 45 industry groups as well as the index. There is still a 100% probability that consensus estimates for the index will be higher in 12 months’ time than they are now. But the average score for individual industry groups peaked in February and has started falling. There are eight industries where the probability of an increase is now less than 50%. More importantly, a downturn in the average industry score is normally a indicator that the index score is also about to decline.

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Fear Volatility not Bond Yields

Wednesday, February 7th, 2018

This is what drives asset allocation

The Great Volatility Slide is Over and it is time to compare the relative impact of rising bond yield vs rising volatility on asset allocation. We conclude that consensus earnings estimates for 2018 provide a substantial margin of safety against the threat of rising bond yields and rising volatility. The margin of safety declines in 2019, but the big threat comes from volatility, not bond yields. On current forecasts, we would need to return to an ultra-low volatility regime in order to maintain an overweight in equities into 2020.

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