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ITPM Flash Summary:
In this blog post, Edward Shek from ITPM discusses the current state of the market and the potential risks associated with the prevailing optimism. He focuses on earnings and how they may impact the market's trajectory. While the market has experienced a significant rally, it is important to consider the underlying fundamentals and exercise caution. Ed explores the recent earnings trends, the potential impact of lower yields, and the importance of carefully selecting stocks in this uncertain environment.
The Market's Reaction to Lower Yields
Edward Shek explains the correlation between lower yields and higher equities has been well-established over the past 15 years. As yields decrease, the market tends to rally, leading to an expansion in price-to-earnings (PE) ratios. This has been the case recently, with the market quickly pricing in the expectation of multiple rate cuts in 2024. As a result, a substantial amount of money has flowed into equities, reaching the highest levels in years.
Earnings Profile and Concerns
Ed believes that as we enter the fourth quarter earnings season, it is crucial to assess the actual performance of companies. While Q3 earnings last year exceeded expectations, Q4 earnings have been revised downward from an initial projection of 8% growth to just 2%. This discrepancy raises concerns about whether companies are intentionally lowballing their earnings estimates to achieve easy beats. The market has already priced in these earnings numbers, but it remains to be seen if they will materialize.
Stocks Reporting Negative Results
Edward Shek believes several important stocks, such as Nike, FedEx, and mobile ey, have reported disappointing results in recent weeks. Despite these negative outcomes, the market has largely ignored them due to the prevailing risk-on sentiment and the belief in strong retail sales. However, a closer look at data from Adobe analytics reveals that discounting in key categories like electronics and apparel has been more significant this Christmas season compared to the previous year. This raises doubts about whether the market's optimism is justified and if earnings will meet expectations.
Potential Risks: Manufacturing and Services
Edward Shek sees the manufacturing sector has been in a slump for over a year, the services sector has been the driving force behind the US economy. However, the recent ISM Services data showed a significant miss, albeit still indicating expansion. The concern arises when considering the rates of change. If both manufacturing and services contract in the coming months, it becomes uncertain whether the expected earnings growth will materialize.
Labor Market Data and Potential Weakness
Edward Shek outlines that the labor market data has been a source of surprise, with some interesting observations. The average hours worked per week have returned to pre-pandemic levels, indicating a tight labor market. However, recent reductions in working hours suggest that if demand falls below expectations, workers may face job losses. Additionally, the response rates from companies submitting data to the Bureau of Labor Statistics have decreased significantly. This raises questions about the accuracy and reliability of the labor market data.
Conclusion: Exercising Caution in an Uncertain Market
Given the uncertainties surrounding earnings, labor market data, and the potential contraction in key sectors, Edward Shek details that it is essential to approach the market with caution. While the market has priced in the pivot and the prevailing optimism, it is crucial to carefully select stocks and avoid chasing trends. Maintaining a diversified portfolio with a focus on absolute returns can provide the flexibility needed to navigate this uncertain environment. As consensus expectations have proven to be unreliable, it is important to stay informed and adapt to changing market conditions.
In conclusion, the current market environment calls for a cautious approach. While animal spirits and optimism have driven the recent rally, it is crucial to consider the underlying earnings trends and potential risks. By carefully selecting stocks and maintaining a diversified portfolio, investors can navigate this uncertain market and position themselves for success. Good luck and happy trading!
Note: This blog post is a summary of a video titled "Animal Spirits versus earnings." The content has been rephrased to ensure it is plagiarism-free.
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