Still Bullish Over Medium-Term; Growth/FAANG Not Done
Our latest review shows that the impressive recovery in our earnings revisions work has finally cooled, somewhat. After a nearly uninterrupted period of improvement from 3/20 through early September, it’s not surprising that a pause occurred. Especially since the domestic economic re-openings stalled during August.
With that said, our medium-term bullish outlook remains unchanged. By itself, a slowing of earnings revision metrics would spell trouble for the individual stocks that experienced rollovers in our proprietary Analyst Sentiment Measure (“ASM”) as well as for the overall market. However, context is important.
If these small roll downs were occurring late in a cycle when the Fed was moving towards a tighter monetary policy backdrop, we would most certainly be shifting to an early bearish stance. That is not the case. This is the beginning of a NEW earnings cycle, and the Fed has made comments that it is likely on hold for quite some time. Thus, the recent minor deterioration in the earnings revision backdrop is likely just a dip in an ongoing multi-year uptrend.
Going forward, I expect the environment to shift from a beta market to a more typical alpha market where idiosyncratic factors become important again, and it will critical to be in the right stocks as differentiation returns. I expect my ERM model will be a valuable tool in highlighting the best stocks to own through year end.
I still see two main areas with favorable readings: Secular Growth/FAANG and Value/Cyclicals. While any stock, sector, or the overall market can have corrections and pullbacks, my work focuses on the most important component of the performance equation: underlying earnings revisions.
If earnings revisions are rising, the tactical overbought situation has been resolved and the price uptrend has a high probability of resuming. On the other hand, if earnings revisions are falling, the price decline is likely to be prolonged and very well may be the beginning of a new down trend.
So, what do the revisions for Growth/FAANG and Tech stocks look like now? They are broadly positive and nothing like the Tech Wreck top of February/August 2000 or the GFC Crisis highs that occurred during 4Q 2007.
Not surprisingly, some of the front-line value/cyclical impacted names (as my colleague Tom Lee refers to as “Epicenter” stocks) are still struggling a bit. Yet, I still have high conviction that this is neither worrisome nor a concern, just part of the longer-term healing process that takes time.
Bottom Line: I expect the environment to shift from a beta market to an alpha market where idiosyncratic factors become important. My ERM model will be a valuable tool through year end to highlight the best stocks to own.
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