My Earnings Work Continues To Show Deterioration, CPI Puts Water on Dovish Fed Pivot
The market was hit with two body blows today, the first was the hotter than expected CPI Print which came in at 8.6% on expectations of 8.3%. The second blow was the lowest reading for the University of Michigan consumer sentiment index, ever. Yes, you heard that right. Those who took heart at Bostic’s comments that the Fed could pause in September have had their hopes dashed. No doves will be taking flight any time soon and 75 bps is back on the table for next meeting.
My work continues to flag that the combination of a hawkish Fed/tightening policy, elevated inflation, slowing growth, rising interest rates, strong USD, continued geopolitical tensions, and my expected analyst profit cutting cycle are creating significant headwinds for the US equity markets. With risk premiums also rising, I am reiterating my unfavorable view on equities, and with a definitive downside price break of 4000 for the S&P 500, it looks quite clear that the late May lows will be tested, and my work expects it to be breached. Thus, I am still targeting my next downside target of 3600-3500. Also, notice my subtle inclusion of the word “next”. I am getting concerned that my target zone may not be the final stop, but I don’t have enough evidence yet to considerably raise the odds of a further move lower. Stay tuned here.
I took a deep dive into my earnings model this week and there is only one word to describe what I saw—U-G-L-Y. Today’s negative CPI surprise gives credence to my assertion that the Fed’s level of hawkishness and resolve had not been full priced into markets. It is unusually hard to find good ideas and there doesn’t seem to be any way we avoid lower prices as more negative pre-announcements and downgrades from analysts seem assured in the coming months. The downgrades and pre-announcements have started but I expect them to get a lot worse.
With earnings revisions being one of the key factors in my and what had supportive my old bullish view from 11/20 to 3/22, it has been clear that my view had to shift towards being bearish as my ASM indicators were rolling and have been getting weaker as each week has passed. In this June review, the trend continues and will likely start a new phase. Thus far, my key proprietary metric for the overall market was above zero with negative slope, but it is now crossing below zero and into the southern hemisphere. This is showing that the average company had only shown decelerating positive revisions but is now shifting to absolute cuts. In several recent publications, I have provided a table that shows that when this happens the S&P 500 has always had negative returns with the average being down 18% (median down 10%) over an average of five months ( Report Link ).
Despite the difficult environment I do see some areas that stick out to me. Normally I don’t like to get into trades that have already enjoyed a long stretch of outperformance, but Oilfield Equipment and Services looks too good to ignore to me. I also like Distillers and Vintners and Large Cap Healthcare. Aerospace and Defense looks good as well. One name looking good is Dominoes Pizza (DPZ-1.68% ), always a friend of the cash-strapped consumer. Additionally, a lot of my Dunks picks still look good: PM2.82% , BKNG-0.45% , LYV0.36% and CCJ-0.15% .
Hang in there. Manage your portfolio tightly and make sure you stay in the game for a large buying opportunity that will likely present itself in the next 6 months. The following names look attractive: SLB-2.14% , BKR1.24% , HAL1.11% , RTX0.84% , GD1.17% , LMT1.84% , NOC2.30% , CPB1.12% , KO2.14% , PEP1.00% , PM2.82% , BF-B, TAP, STZ, UNH, CNC1.90% , and ANTM
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