I’ve been discussing my cautious and unfavorable outlook on US equities for a few months now, and there have been no significant changes in my key indicators to suggest that a change in view is appropriate.  While we are not in a “hide under your desk” market now, the backdrop for equity investors remains quite challenging to say the least.  Last week, markets finally had a positive finish after eight consecutive weeks down on the DJIA.  The symmetric nature of the price performance gains to the sectors that experienced the greatest losses in the previous drawdown provides some clue that the bounce was little more than short covering and positioning tweaks by institutional investors. There has been no shift on the macro front in my view.  As I stated previously, my analysis suggests that tactical rallies may occur but that they will likely be of short duration. I ultimately expect them to fail despite how sharp the rebound may appear to be.  I continue to highlight the risks below as providing strong headwinds for the equity market:

• Russia/Ukraine conflict – no end in sight
• Elevated energy prices and their negative impact on both inflation and consumer demand
• Interest rate pressures
• Less accommodative monetary policy and now the start of Quantitative Tightening II
• Economic growth slowdown fears are beginning to increase, which will likely run concurrently with my expectations for 1-5 months, at minimum, of an earnings revision cutting cycle that disproportionately hits all things cyclical

After nearly two months of equity prices consistently moving lower, the oversold U.S. market found a glimmer of hope from a couple of OK earnings reports that were released and a Fed Governor comment that implied the FOMC might shift from definitive tightening to becoming data dependent at some point during the summer.  From the oversold readings that my indicators were flashing, the equity market was likely to bounce for any reason.  Importantly, I want to strongly urge that investors take on board my warning that a wave of earnings revisions cuts is in the early innings and my research is pointing to more on the way.  Importantly, since 1990, I have identified five occurrences when my proprietary earnings revision indicator for the overall S&P 500 crossed below zero as shown in my recent Wall Street Whispers.  In these periods, the S&P 500 fell on average 18% from that point, and the median decline was 10% over an average of five months, with every event being adverse.

This analysis, coupled with signs of cracking in the US consumer’s strength, also supports my forecasts for forward profit expectations to be lowered by the Street.  With the cost-of-living increases that have occurred during 2022, it is hard to imagine that aggregate discretionary spending will be able to keep accelerating for the remainder of the year, which would imply either a slowing or likely an outright contraction at some point. 

As I said in my last update, there is unfortunately not a magic bullet that will fully insulate long-only investors from the shaky markets in which we now find ourselves. Bear market rallies can be deceiving, and there are clear signs of a slowing economy that could be exacerbated by any of the above significant risks. It is encouraging to see some moderation in the inflation rate, but let’s also remember we are still noticeably above the Fed’s desired target. Ultimately, the FOMC will have to change course as they always do in time, but markets tend to overshoot before that point occurs. My work shows that the equity markets are still in the earlier phases of dealing with the Fed’s monetary policy adjustments as well as analyst earnings cuts.  This combination leads me to reiterate that I expect the S&P 500 will at least reach my next downside target of 3,600-3,500 before we can start looking to be aggressive buyers once again.

On an absolute basis, my Dunks have struggled as it was unfortunate to launch the product as the equity market environment shifted to turbulence and weakness.  Importantly, however, my picks have held up relatively well during this rocky period, and please remember that I aim to identify equities with a favorable risk/reward over a 12-18 month period. The substantial outperformance of our Energy pick, FANG1.10% , has helped make the relative performance better than it otherwise would be. ISRG is a significant laggard, but I consider this is a solid stock with a sustainable moat and business model. I also expect the post-COVID boost in foregone surgeries could be a tailwind. AMZN has been another laggard, but I expect they were doing a mea culpa quarter, and my earnings work remains firm on the name. I am still optimistic about potential revenge spend beneficiaries LYV and BKNG. The consumer appetite for their products will likely be less adversely affected by a slowing economy than usual. My research is still favorable for CME, AMT, and PM and these names should hold up OK even in this defensive environment. 

We are following up from our Dunks Earnings Update on 4/28/22. We have provided an update on the remaining Dunks and Midrange Jumpers that reported after that date below.

This energy stalwart reported earnings on 5/3/2022. The company beat expected EPS by 11.33% and revenue by nearly 25%. The stock has been the top performer of our Dunks portfolio, and the Energy sector is continuing to lead the S&P 500 on a sector basis. This company is one of the largest and most successful operators in the Permian Basin and should continue to benefit from elevated energy prices. The company has a strong balance sheet, and upside likely remains given the company’s attention on augmenting free-cashflow which will benefit shareholders.

The company reported on May 5^th and had its biggest increase in 18 months when results were significantly more robust than analyst expectations. A travel rebound in North America and Western Europe helped explain the beat; gross bookings were nearly a third higher for both regions compared to 2019. The CEO said if the current trends continue, there could be a record summer travel season. The company reported that revenue rose 136% in the three months ended 3/31/2022. Gross bookings came in at $27.3 billion, which was the highest level on a quarterly basis in the company’s history. BKNG’s EPS was $3.90, smoking the estimate of 71 cents.

The company reported its earnings on April 28^th. While there was strength in Amazon Web Services, which exceeded expectations, the rest of the report was dismal. They posted losses per share for the first time in over four years. They missed on EPS significantly, and the write-down of their stake in Rivian Automotive also hurt the company. The company fell significantly after earnings. Operating income for FY2022 is expected to be between -$1 billion and $3 billion. This seemed like a mea culpa quarter in many ways.

This live music behemoth reported mixed results. Earnings beat consensus estimates with a loss per share of only 39 cents on expectations of 98 cents per share in losses. The company missed on revenue, though, which came in at $1.8 billion, short of the $1.9 billion that had been expected. The concert segment was up significantly from the same quarter a year ago, and total events have gone up tenfold. Total estimated ticket sales were a gargantuan 111,292,00. We expect this company to continue benefitting from revenge spending on concerts which was foregone for much of the pandemic by many consumers.

This uranium miner reported on 5/5/2022. The company dramatically outperformed expectations. While it narrowly missed on revenue, it beat EPS expectations by triple digits. Operating Income, Net Income, and Net Profit Margin exceeded expectations by triple digits as well. Uranium is one of the many commodities adversely affected by the Russia/Ukraine conflict, and rising prices helped benefit the Canadian firm. The company raised its 2022 guidance by 14%. The company has a pretty modest valuation, and its earnings beat is consistent with my strong readings on the name.