“We don’t see recession risk likely in the near term,” St. Louis Fed chief James Bullard said on Friday.
Well, that’s great Jim but when it comes to corporate profits, the recession started four quarters ago and now, it looks set to continue into Q3 2016. We were perusing Bloomberg headlines when we ran across this:
“U.S. profit forecasts have turned negative for 2016 as the latest earnings season has failed to stem downgrades from analysts. S&P 500 profits are now expected to fall 0.1% for FY 2016, and 0.8% in 3Q y/y, down from estimates of a 0.7% rise for 2016 and 1.8% rise for 3Q before the earnings season began four weeks ago, Bloomberg data shows. In late December, analysts were expecting a 7.1% rise in 2016 profits.”
Take a minute to let that sink in. Analysts were expecting a 7.1% increase in profits for the year and now, we’re all the way down to -0.1%. One wonders what exactly it is they’re “analyzing” to come up with numbers that are so dramatically wide of the mark. Here’s a visual from FactSet (they’ve included a giant red arrow in case you’re having trouble understanding the graph):
(Chart: FactSet)
If Q3 EPS does indeed come in negative that’s six straight quarters of negative earnings growth, which would be the most since the crisis years. And if stocks continue to hit new records simultaneously, that means multiples will likely expand towards 20X, something we’ve basically never see outside of the dot-com bubble.
“We continue to believe that consensus estimates of a rebound in 2H earnings, to new highs particularly in the U.S., are too optimistic,” JPMorgan equity strategist Emmanuel Cau said on Thursday.
Looking out to next year, Deutsche Bank is cutting their estimates citing a stronger dollar, a flat curve, subdued crude prices, and a dour macro backdrop. Here’s some color:
“2017E S&P EPS cut at Energy & Financials on lower oil price and rates outlook. Renewed oil price weakness indicates that rebalancing the global oil market will take longer and be bumpier than many expected. 1Q & 2Q results suggest a break even WTI price for S&P Energy profits at $40-45/bbl. We’re uncertain when the Fed hikes, but regardless we expect the dollar to grind upward and 10yr Tsy yields to stay under 2% well into 2017. A hike will likely boost the dollar, contain wage inflation and flatten the curve. But even without a hike, we think inflation risks are too low to significantly boost Tsy yields medium- term in a nil real rate world. Given this macro backdrop, we lower our 2017 oil price and interest rates assumptions and thus cut 2017E Energy & Fin EPS.”
And here are the infamous fishhooks:
(Chart: Deutsche Bank)
Meanwhile, S&P was out today with an update on global corporate defaults which now sit at 111 YTD, up 63% versus the same period last year. 74 of the 111 are US corporates.
It’s against this backdrop that every major asset class experienced inflows last week. We’re not kidding:
(Charts: BofAML)
It’s all bid. Every bit of it.
And just to round out the insanity as we head into the weekend, have a look at what BofAML’s clients said when the bank asked them how they expected the low Treasury yields, record equity prices paradox to correct itself:
It blows the mind.
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