Several Reasons for Optimism this Winter

A lot has happened in since the beginning of the year, but there are still several reasons for optimism.

Bullish Points:

• Oversold Contrarian Indicator:
  • S&P is in correction territory in just 16 days, the fastest ever. Nasdaq more oversold than during height of Covid fears in March 2000.
• Stocks can go higher with Fed tightening:
  • Jefferies noted S&P was higher in the 12 months that followed the start of each of the last seven Fed rate hike cycles, with an average gain of just under 10%.
• Stocks can go higher with inflation in the short-term and the long-term:
  • Credit Suisse recently noted that over the past 4 ½ months, stock prices have risen an average of 32 basis points on days when inflation expectations rise, and fallen an average of 41 basis points on down inflation expectation days.
• Earnings on track for fourth straight Q of 20%+ growth and 2022 looks solid:
  • According to FactSet, S&P 500 earnings are now expected to increase ~23% in Q4, marking the fourth straight Q of growth above 20%. S&P 500 earnings expected to increase 9.4% in 2022 despite difficult comparison.
• Equities continue to see inflows:
  • According to B of A, after attracting a record $949B in 2021, which exceeded the cumulative inflow of the prior two decades, global equities have seen inflows of ~$67B to start 2022.
• Corporate buyback window has opened back up:
  • Corporations have been biggest net buyers of shares during last decade and according to the Goldman Sachs buyback desk, repurchases are expected to total a record $975B in 2022.
• Omicron (which has been milder than other variants) peaking:
  • Daily Covid cases down 5% from recent high and some companies in epicenter industries (airlines) have talked about near-term demand rebound. Theme of shift from pandemic to endemic starting to get more traction.

Bearish Points:

• Central bank liquidity tailwind fading:
  • Hawkish pivots by Fed and other leading central banks have liquidity consequences as BofA has noted that after purchasing $8.5T in 2020 and $2T in 2021 (or $2.6B every trading day during Covid era), the figure flips to -$0.6T in 2022.
• Earnings beats have underwhelmed, guidance has disappointed:
  • Multiple firms have pointed out that Q4 earnings beats have underwhelmed, while companies have issued negative guidance for Q1 (and Omicron expected to drive more warnings) and analysts have started cutting 2022 estimates.
• Omicron adds to margin risk:
  • Omicron exacerbating supply chain and input price pressures, while also presenting another risk for consensus expectations for record margins in 2022 as staffing shortages play into tight labor market theme and drive wages higher.

Source: FactSet, Inc.