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Earnings Season on Deck — A few weeks ago, Jamie Dimon warned of an inbound hurricane. As he was saying this, we were smack dab in the middle of some serious valuation compression, particularly as liquidity concerns entered the chat and growth was all but dying.
That might have just been the overture of this dastardly symphony.
Everything tends to return toward the mean. For those of you who don’t math good, the mean is the average.
In 2021, earnings for the S&P climbed 47% YoY. While this isn’t a shocker, so to speak, given 2020’s lockdowns and governmentally forced economic slowdown, it’s not sustainable.
The earnings forecast for 2022 called for a mere 8% increase in S&P earnings for the year. Oh, man… what I wouldn’t do to see this.
There’s a good piece in Barron’s today about earnings estimates being in la-la land. I’m of the mind that estimates need downward revisions and in a hurry.
In case you can’t read through the lines, I’m not optimistic about the immediate future of big companies making money hand over fist.
I think that’s okay. You can formulate your own opinions on it, but if you’re reading us here, we’d like you to appreciate the nuance.
We are probably through the first step of the pain, which is a regression toward the mean. That was PE or valuation compression.
The next step, which usually coincides with an economic slowdown and a bear market (sound familiar?), is earnings compression, which has a tendency to adjust stock prices lower as well.
The bond market is screaming that a recession is coming. We’ve seen an inversion of the treasury yield curve, and the two-year yield has moved markedly higher. It doesn’t take a PhD in astronautical engineering from MIT to notice that bond markets are hinting at a recession in the next 6-24 months.
Can we survive it? Yeah, I’m sure we will. Our portfolios might take a bit of a haircut, but there is indeed some good news.
Buying stocks at all-time highs doesn’t leave a lot of room to run. I’m happy to scoop up some quality names that are fueled by returning value to their shareholders as opposed to generating hype.
Think about it: you make most of your money in a bear market, but you usually don’t realize it as it’s happening to you.
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