Bloomberg
Slaughtered bulls point to higher rates for ‘right reasons’
(Bloomberg) – With Tesla Inc. leading another sale in the darlings of the moment amid rising bond yields, some investors fear that this means the 11-month bull market is in trouble. The rise in earnings last week has certainly stirred nerves. active. On the fringe of the stock market, where signs of excess have become obvious, investors are giving up. Tesla fell more than 10% at 10 am in New York, after falling 8.6% on Monday. Bitcoin has plunged up to 18%. Seen more broadly, however, rates remain relatively low. When compared to measures of earnings returns, stocks still offer a premium almost four times higher than the historical average. At the very least, profits can explode as Wall Street economists raise their economic growth forecasts to levels not seen in decades. This would justify stock assessments that, according to some traditional measures, seem stretched. The optimists’ argument for equities in a period of rate hikes is that securities settlement is caused by signals emanating from the commodity markets and economic data, such as retail sales. The Biden government is about to pass a huge spending bill and Federal Reserve President Jerome Powell, who testified before Congress on Tuesday, is committed to keeping short-term rates close to zero. “When we look at the scenario today, rates are rising for the right reasons,” said Peter Mallouk, CEO of Creative Planning. Although some think the market has to fall, as it is trading at the upper end of the valuations, he said: “The reality is that it can remain high as profits rise.” The stocks under the most pressure this week dominate the sky. high valuations that become more difficult to justify as Treasury yields increase. And a valuation methodology sometimes called the Fed model, which compares corporate earnings to bond rates, has started to move against bulls. At the moment, the yield on S&P 500 profits – how much profit you make from stock prices – is about 1.79 percentage points higher than the yield on 10-year Treasury bonds, the lowest advantage since September 2018. But any flashing warning for this metric is dark. The current premium is still well above the average of 48 basis points in Bloomberg data since 1962. That means, everything else equal, that stocks can still be framed as attractive compared to history when 10-year yields fall below 2.67%. Yields have recently been close to 1.36%. In a note published earlier this month, strategists at Goldman Sachs Group Inc., including Ryan Hammond and David Kostin, said that stocks are generally able to digest gradual increases in interest rates, especially when driven by growth and not by US policy. Fed. What tends to cause turbulence in equity are sudden increases. Inventories typically fall on average in a given month, when rates increase by two or more standard deviations, which is 36 basis points under today’s terms. Yields rose by 30 basis points this month, reaching the highest increase in 12 months. Katie Nixon, chief investment officer at Northern Trust Wealth Management, agrees. “While interest rates may have gone up in the wind in favor of upward revisions to growth and inflation, both variables also tend to be positive for stocks – to some extent,” said Nixon. rates go up in a disorderly way that risky asset markets react negatively. ” Still, anyone who is nervous that the stock has gone over fundamentals can take comfort in the latest rise in yields. In August, when the S&P 500 fully recovered from losses during the bear market in 2020, earnings from 10 years ago they were sending out a threatening signal with a drop to record lows In a way, the yield catch-up indicates that the bond market is finally endorsing the bullish economic message that stocks have been flashing since last March. to look at this: stocks look extremely stretched based on earnings reported in the past 12 months that included the pandemic recession. In that metric, the S&P 500 multiple price-earnings ratio stood at 32, eclipsing the peak level seen during the dot-com The value case gets a little more encouraging when measured against this year’s earnings. With analysts expecting earnings to increase 23% to $ 171 per share, the P ratio / L drops to 23. If companies continue to exceed estimates by a large margin, the picture will get even better. Fourth-quarter earnings were 16% higher than expected, a pace of positive surprises that, if sustained, would push earnings from 2021 to $ 198 per share. This would result in a multiple of 20. “What appear to be very high valuations of US stocks are defensible if (and only if) profits recover strongly in the second half of the year,” wrote Nicholas Colas, co-founder of DataTrek Research. on a recent note. “There are certainly micro-bubbles (some SPACs, IPOs), but there is also a good case that the shares as a whole can and will win their way to high ratings.” This is not to say that earnings do not matter for stocks now. The money quickly came out of highly valued stocks like Tesla, with the Nasdaq 100 falling for the sixth day, the longest losing streak since August 2019. At the same time, companies that benefited from an economic recovery delivered gains fared better . “Investors are not positioning themselves in areas like finance and energy that are really benefiting from things like rising yields, rising commodity prices. I think there is a little confusion, ”said Lori Calvasina, head of US equity strategy at RBC Capital Markets, in an interview with Bloomberg Television. “It is more of a repositioning story within US stocks, rather than coming out of US stocks.” (Updates with Tuesday’s prices in the second and penultimate paragraph) For more articles like this, visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source. © 2021 Bloomberg LP