by Bryan Perry
August 2, 2022
In July, the stock market enjoyed its best month in a long time, pulling up off its June lows and putting in a healthy performance. Earnings season has been anything but the “whistling by the graveyard” scenario that so many notable Wall Street gurus had been touting. After all, they are supposed to have the inside-inside channel on the biggest and most important news for companies that signal the market’s core health.
They couldn’t have been more wrong. At the start of last week, on July 25, just before some of the biggest names in the chip sector reported, a Barclays analyst said that “a large cut to earnings is likely coming” over the next 12-18 months, as he called for a 30-40% earnings cut. He further wrote, in a client note:
“The point here is that this downturn in not relegated to just the low-end Consumer markets, and we see the weakness in those markets today as a precursor to corrections in markets such as Industrial, Auto, and the Data Center. We don’t like much of anything in the group and think the recent bounce only sets up a higher bar for the correction coming.” (Source: Investing.com)
To call for a top in the chip sector right before the biggest and best names in the field report is somewhat confusing to investors. Why not wait a week to have the luxury of a thorough report on current business conditions – and their best forward guidance to work with – before making a 12-18-month call? As it turned out, those chip companies with the most exposure to the auto, industrial, and cloud space not only reported better-than-expected Q2 results, they also provided glowing forward guidance of future demand.
Next up, famed fund manager Dan Niles jumped in front of the earnings train and got run over, when he said on July 26 that he sees “an ugly week ahead for Microsoft, Alphabet, Amazon, and Apple,” saying he “dumped a number of Internet and mega-cap tech stocks going into earnings week” (CNBC, July 26).
Whatever Niles is trading in his hedge fund is his business, but to use a global media platform the size of CNBC to cry “Wolf” as loud as he did I’m sure influenced thousands of investors to bail out on their positions before earnings crossed the tape – only to see these specific stocks gap higher after reporting.
Then there is the venerable bear, Mike Wilson, Morgan Stanley’s U.S. equity strategist and chief investment officer, defending his bearish case on CNBC July 27 after the S&P 500 had gained 8% in 10 days, stating that the post-Fed rate hike rally was “a trap.” He “believes stocks are on a collision course with more pain due to the economic slowdown and investors should resist putting their money to work in stocks” (CNBC, July 27). As a weekly guest on CNBC, Wilson gives his viewing audience a steady diet of his bearish worldview. He was bearish during all of 2021 when the market soared, then he was right for six months, and now he is doubling down on his negative thesis. But alas, his thesis is not working now.
Lastly, the super-perma-bear, 83-year-old Jeremy Grantham, co-founder of Boston asset manager GMO, is still at it. In a July 18 interview with the Associated Press, he said that he expects “feeble company earnings to worsen,” causing the current bear market to plunge by “another 25%” before reaching fair value, and this nightmare could last anywhere between six months and three years!
Grantham oversees $65 billion in assets under management (AUM), so when he talks about the sky falling on equity investors, he has a global platform that scares millions of investors out of the market.
It is true that if you say something long enough, you’ll eventually be right, so he seemed right for much of the first half of 2022. To Mr. Grantham’s credit, his position warrants consideration, but coupled with similar views from Niles, Miller, and a host of other bears, it should come as no surprise that the market was on eggshells before reporting season. Thankfully, it’s not turning out to be a bursting stock bubble.
Navellier & Associates owns Microsoft (MSFT) and Amazon (AMZN), a few accounts own Apple Computer (AAPL), and Alphabet Inc. Class A (GOOG) in managed accounts. We do not own Morgan Stanley or Barclays. Bryan Perry does not own Morgan Stanley (MS) or Barclays (MSFT), Amazon (AMZN), Apple Computer (AAPL), and Alphabet Inc. Class A (GOOG) personally.
The Facts Don’t Support the Super-Bearish Scenario
As of July 29, according to FactSet Earnings Insight, for Q2 2022 (with 56% S&P 500 companies reporting actual results), 73% of S&P 500 companies have reported a positive EPS surprise, and 66% of S&P 500 companies have reported a positive revenue surprise. For Q2 2022, the blended earnings growth rate for the S&P 500 is +6.0%. On June 30, the estimated earnings growth rate for Q2 2022 was +4.0%.
If we were in a recession, it may be over this quarter. The latest data from the Atlanta GDPNow’s flash reading from July 29 shows +2.1% growth for the third quarter, revised up from the -0.9% reported only three days prior. Their BlueChip economists see a consensus of +1.8% growth. If this is a trend reversal – and it sure has the look and feel of it – it stands to reason that the next pullback for stocks, probably in the post-earnings season, will be when fund managers holding high levels of cash will be buying on the dips.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There is a lot of pride on the line for these famous market bears, but investors might want to turn off the TV set and pay more attention to the lines on the charts, like that of the VanEck Semiconductor ETF (SMH), which tends to be a leading economic indicator. Assuming the charts don’t lie, there is a new bull case for the chip sector following the current upside break above the multi-month downtrend line.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Many times, it is darkest before the dawn, and sentiment was definitely dark going into Q2 earnings season. But now, we are quickly discovering that sales and earnings were nowhere near as bad as feared.
Commodity prices corrected, setting in motion lower future inflation data. Bond yields retreated sharply, and the labor market remains very healthy. There is an ongoing shortage of housing supply, and the Atlanta Fed is upping their growth forecast. That’s a healthy list of positive indicators, looking forward.
August and September are historically bad months for stock market performance, so there is potentially an excellent window to put capital to work in those sectors and stocks that shined in Q2 and put forth the rosiest guidance. We could see one more broad pullback for this short-term overbought market and there could be Goldilocks sightings after Labor Day. Make your list of desirable stocks, and check it twice.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Is This a Recession or Not? – Most of the Details Say “Not Yet!”
Income Mail by Bryan Perry
The Bad News Bears Are Losing the Narrative War
Growth Mail by Gary Alexander
Real Growth Depends on Innovation, Not Intervention
Global Mail by Ivan Martchev
EU Natural Gas is Moving Fast
Sector Spotlight by Jason Bodner
Things Aren’t Always What They Seem
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Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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