Stocks continue to creep higher, even the Nikkei 225 hitting a 26-year high. BATS (British American Tobacco as once was) announcing on Tuesday what it believes the impact on the company earnings will be from Trump’s tax proposals. “All things being equal this will result in a benefit of 6% to 2018 earnings per share”. One can therefore see why investors believe that these reforms will offer a new leg to the equity market, alongside an overall improvement to the global economy.
This is the time of the year for the sales as retailers look to shift the last of their autumn and winter clothes to make room for the spring and summer collection. One gets the sense investors keep waiting and hoping for a similar event in equity markets. They don’t want prices slashed just a small mark down to encourage them back into the store. They know a sale will come, they just don’t know when. How long can they wait before getting to impatient and the desire for more retail therapy takes over? For years investors have been reluctant bulls, they are now reluctant bears. This point of euphoria that constantly gets quoted, feels as if it may be in everyone’s mind but is it in their portfolios?
To illustrate this point, according to a Bloomberg article, analysts are “ratchetting up” their forecasts at the fastest pace in more than ten years. Citi believe earnings revisions are at an all-time high. Considering that for a large part of the past ten years, earnings growth in line with the global economy has been modest, this may be not quite such a surprise. There may be some catching up to do. They are quoting a piece of research from the Bespoke Investment Group, according to the report the unusual thing this time is that this is happening just at the start of earnings season.
The pace of upward earnings revisions of earnings of the broader S&P 1500 has reached its highest since 2010. The point of the article is when equity analysts get too bullish there is little room for positive surprises and therefore a correction could be imminent. The report goes on to point out that the last time the gap between analysts lifting and those lowering forecasts was this wide we saw a 15% correction in equity prices. It did need a catalyst though, which was the Dubai debt crisis. The question is this time, what is the catalyst?
As one can see for the chart courtesy of Bloomberg and Bespoke, when were analysts there most bearish in recent history? Late 2008, early 2009. Analysts do have a great track record, as contra indicators! One can also see the reason why investors have been reluctant bulls, analysts have been pretty cautious on earnings, from 2011 till now as earnings revisions have generally remained negative through that period. Until now.