“We continue to think this year will be defined by an earnings recession, with uncertainty on trough levels and timing, and a Fed that backs off and possibly reverses its tightening stance,” Mr Wilson wrote. “In this environment, volatility is likely to flare episodically, creating big swings once again even though that hasn’t been the case so far.
“As such, we think it’s important to be disciplined on price when considering risk-reward, particularly as idiosyncratic risk becomes the dominant driver of stock prices as opposed to beta.”
Separately, FactSet senior earnings analyst John Butters said the estimated net profit margin for the S&P 500 for the March quarter was poised to drop year-over-year for the first time since the final three months of 2016.
Mr Butters said analysts’ estimates put the first quarter’s net profit margin at 10.8 per cent, with 10 of the S&P 500’s 11 industry sectors projected to record a decline led by the information technology (20.1 per cent v 22.3 per cent), communication services (11.3 per cent v 13.2 per cent), and materials (9.1 per cent v 10.6 per cent) sectors.
‘Easy part’ of rally over: LPL
While somewhat wary of the speed of the S&P 500’s rebound, LPL Financial Research’s Ryan Detrick retained his optimism about the outlook.
“Stocks are quite extended near term,” Mr Detrick said, “but historically, extended markets have tended to deliver continued outperformance over the next several months.”
Mr Detrick said more than 90 per cent of stocks in the S&P 500 were above their 50-day moving average and that was a bullish sign. After 90 per cent of stocks in the S&P 500 go above their 50-day moving average, their one-, three-, and six-month returns actually showed continued strength, he said.
“Three months after hitting that 90 per cent mark, the S&P 500 has been higher 12 of the previous 13 times going back to 1990,” he said.
Still, the surge in stock prices could be signalling that, at least, a pause was ahead, he added. “The easy part of the recent rally is over, and we do see reasons to expect some type of consolidation or well-deserved pullback at some point, but we still think the stage is potentially set for new highs later this year,” Mr Detrick said.
Doom to Zoom: Yardeni
In a note titled ‘Stocks go from Doom to Zoom’, market strategist Ed Yardeni said he was lobbying for the bull market to extend itself.
“The [current] bull market’s 62 panic attacks, including the outright corrections and mini-corrections, have tended to revitalise the bull. There is a widespread notion that corrections are normal and healthy occurrences in a bull market. If so then, we reckon that the bull has been recharged more often than any other, though we don’t have a diary of the panic attacks during previous bull markets as we do for the current one.”
Mr Yardeni said the main cause of corrections tended to be fears of recessions that don’t pan out. “Bear markets usually occur when the fear is realised. In any event, the latest relief rally hasn’t completely relieved anxiety about an impending recession.”
With the exception of very strong labour market indicators, many of the economic indicators released for December and January have been weak, Mr Yardeni noted.
Federal Reserve chairman Jerome Powell this week has an opportunity to burnish the rally in his semi-annual testimony to Congress.
“We think all the equity market cares about is whether or not QT is going to be coming to a relatively quick end. On that score, we think that is exactly what Powell will suggest,” RBC Capital Markets said.
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