The Daily Prophet: There's Just No Pleasing Stock Analysts
(Bloomberg) -- Corporate earnings are strong. Companies in the S&P 500 Index are on track to post first-quarter earnings-per-share growth of 21.6 percent, the most in seven years and above forecasts for a 16.5 percent increase, according to Bloomberg Intelligence. And yet, the best anyone can say about the performance of stocks in April is that they are meandering, with the S&P 500 ending April almost 2 percent below its high for the month two weeks ago.
What gives? The stock market is a reflection of what's to come instead of what has happened. And in that regard, the outlook doesn't look so rosy. In fact, earnings estimates for the next four quarters have actually decreased as the boost from lower corporate taxes produces difficult comparisons. Analysts have been shaving their estimates for the next 12 months, and now see earnings growth decelerating from 20 percent this year to 8.7 percent in 2019, according to Bloomberg Intelligence. The leaner forecasts are most pronounced for companies in the technology and discretionary sectors, with the financials not far behind.
"The strongest quarterly earnings-growth pace in seven years hasn't convinced analysts that the party will last, as declines in estimates for the next four quarters confirm their skepticism," Bloomberg Intelligence analysts Gina Martin Adams and Peter Chung wrote in a research note Monday. Energy offers the greatest upside, as it's the only sector with positive earnings revisions for the fourth quarter of this year and the first quarter of 2019, they wrote.
BOND BEARS MASS
Despite a rebound in recent days which has pulled 10-year Treasury yields back below the key 3 percent level, April was a pretty good month for the bears. The Bloomberg Barclays Global Aggregate Bond Index was down 1.57 percent in April through Friday, its worst month since November 2016. And it may get worse, if hedge funds and other large speculators are to be believed. Those investors built a record position betting against 10-year Treasuries, according to data from the Commodity Futures Trading Commission. The net short stance increased by 90,444 contracts in the week ended April 24 to an unprecedented 462,133, according to Bloomberg News' Lananh Nguyen. Strategists at JPMorgan Chase & Co. led by Nikolaos Panigirtzoglou figure that a large portion of those bearish bets come from so-called commodity trading advisers, which try to profit from emerging trends, according to Bloomberg News' Dani Burger and Sid Verma. As such, there might not be much conviction in trades speculating on further weakness in the bond market. That could leave the market prone to a quick rebound if the CTAs find the downward momentum in bonds has shifted and decide to reverse their bets. "Momentum traders are less likely to remain as a strong bearish force" going forward, the JPMorgan strategists wrote in a research note.
SPRINGTIME FOR DOLLARS
America's currency was wrapping up April with its best monthly performance since November 2016, with the Bloomberg Dollar Spot Index up 1.95 percent in late trading Monday. Most strategists say that the turnaround is most likely due to two factors. First, interest rates in the U.S. have risen to a level where it has become too expensive to carry near-record short positions against the dollar. Second, the euro zone economy has weakened a bit, hurting the euro. For those reasons, few traders are willing to bet that the recent gains are the start of a structural rebound in the dollar after it depreciated some 11 percent over the last five quarters. In a research report, Western Asset Management money manager Robert Abad wrote that the Trump administration's protectionist rhetoric, for one, should keep the dollar from appreciating. Plus, recent tax legislation "includes front-loaded gimmicks" that only add 0.25 percentage point to 0.5 percentage point to gross domestic product annually, Abad wrote. "We do not believe recent periods of U.S. dollar strength represent the start of something more permanent," Abad added. "Instead, we see the U.S. dollar succumbing to the gravitational pull of cyclical and technical forces that should bolster the appeal of non-U.S. currencies, such as the euro and select (emerging market) currencies."
The bad news for drivers prepping for the all-important summer driving season is that the price of regular gasoline in the U.S. has risen 13 percent this year to $2.811 a gallon, the most since 2014. And now, those investors who make a living trying to figure out where prices go next are nearly all in agreement that they can only go higher from here. Hedge funds and other large speculators increased their net-long position on benchmark U.S. gasoline by 14 percent to 111,397 futures and options contracts, during the week ended April 24, according to the U.S. CFTC. That’s the highest on record in data going back to 2006, according to Bloomberg News' Jessica Summers. “People are gambling that the strong economy will yield a very strong driving season and that may stress out the refining sector,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, told Bloomberg News. Gasoline products supplied, a measure of demand, rose to a record earlier this month, according to U.S. government data.
South Korea's financial markets are benefiting from the easing of geopolitical tensions on the Korean peninsula. The benchmark Kospi index of stocks closed on Monday at its highest level since early February. The gauge rose 2.84 percent in April, compared with 0.84 percent for an MSCI index of Asian stocks and a drop of about 0.6 percent for global emerging markets. At one point on Monday, the won was enjoying its biggest two-day gain since November, rising 1.40 percent. Even so, more than a few analysts said the historic pledge by the leaders of South and North Korea to end their war and pursue denuclearization isn't likely to mark the start of a bull market in Korean markets. Fitch Ratings issued a statement saying the outcome of diplomatic activity in the coming months is hard to predict, and tensions could re-escalate quickly if the US feels that summit diplomacy is not achieving its aim of denuclearization. There's also the issue of South Korea's softer economy. A government report Monday showed industrial output dropped 2.51 percent in March, the biggest monthly decline since February 2017.
The Institute for Supply Management will release its monthly report on manufacturing Tuesday. The consensus is that the overall level of activity remains at about the highest since before the financial crisis. But what may get more attention is the various components of the survey, specifically the one dealing with new orders, which is a good barometer of future activity. That part of the index has fallen for three straight months and sits at the lowest level since August. Another decline in this survey may spark talk of how the tax reform is doing very little to juice the economy or how the potential for trade wars is making companies more cautious.
Flat Yield Curve Is Just What the U.S. Economy Needs: Tim Duy
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
©2018 Bloomberg L.P.