Credit Suisse's Golub trims S&P 500 2022 target
Posted On May 5, 2022
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CREDIT SUISSE’S GOLUB TRIMS S&P 500 2022 TARGET (1220 EDT/1620 GMT)
Credit Suisse chief U.S. equity strategist and head of quantitative research Jonathan Golub cut his year-end S&P 500 target to 4,900 from 5,200 on Thursday, citing the impact of higher inflation and tighter monetary policy on the cost of capital.
The new target, which represents a 13.9% gain from Wednesday’s closing level and 2.8% rise for the year, is based on a PE of 19.2, down from 20.4, said Golub who also reiterated his EPS target of $235 for 2022 and $255 for 2023, implying growth of 12.2% and 8.5%, respectively.
Golub said the new outlook reflects a shift in market conditions year-to-date around “persistently higher discount rates on elevated Treasury yields and a likely reversal in higher credit spreads/volatility, leading to a recapture of 50% to 60% of the lost multiples.”
However, Golub did note the economic landscape remains quite supportive of corporate profits and nominal GDP expectations continue to climb, which supports above-trend revenue growth. Higher input costs are also being passed on through pricing power, leading to operating leverage of fixed expenses. Should those dynamics remains in place, the 2022 EPS projections of $230 are trending toward his $235 view.
WHEN RELIEF TURNS TO FEAR (1148 EDT/1548 GMT)
After the Federal Reserve’s widely anticipated half-a-percentage point rate hike, Wall Street seemed relieved on Wednesday. And even though the U.S. policy maker discussed uncertainties, the party in stocks made it look like Chair Powell had opened champagne bottles.
But investors who decided not to indulge much may be grateful today. Sam Stovall, Chief Investment Strategist at CFRA Research said Wednesday’s relief rally likely forced traders to cover shorts.”
He also pointed to analysis from Lowry Research, a CFRA technical analysis business, saying Wednesday’s enthusiasm would “likely be a short-term rally, since we were not oversold” beforehand. This comment was made before Thursday’s selloff.
While the market rejoiced that a 75 basis point increase isn’t on the table, for now at least, several commentators sounded highly skeptical of Fed policy including Nancy Davis, founder of Quadratic Capital Management.
“The market is way too optimistic about the Fed’s ability to tame inflation. The Fed is hiking aggressively into a weakening economy. They can raise rates as much as they want – rate hikes don’t put more truckers on the roads,” said Davis.
Over at Thornburg Investment Management in Santa Fe, New Mexico, Jeff Klingelhofer, co-head of investments wrote Wednesday that while Fed Chair Jerome Powell doubled down on his commitment to tackle inflation, “In their hearts and minds, the Fed is clutching to the idea of transitory inflation—they just can’t say that out loud.” But he said, “if goods prices fall and inflation lands at 4% by the end of the year, break out the champagne toast.”
Fast forward to Thursday, SVB Private Bank Chief Investment Officer Shannon Saccocia said investors are now worrying about what’s behind the Fed’s decision to avoid a 75 basis point hike.
“If the Fed is potentially signaling it wants to continue to be aggressive but may not need to be as aggressive, which is what the market perceived yesterday, accurately or inaccurately, that implies that economic growth is slowing,” said Saccocia.
“That ends up being the real catalyst. For the Fed to slow down there needs to be meaningful demand destruction happening organically. If demand destruction is happening organically, particularly on the consumer side the economy is slowing down. There’s a perception that will negatively impact revenues and earnings.”
AN END TO THE WORKER DROUGHT? JOBLESS CLAIMS, LAYOFFS, ETC(1047 EDT/1447 GMT)
Market participants, digesting the Fed’s 50 basis point rate hike, began their Thursday with a three-course meal of labor market data to chew on.
And all of it arrives on the eve of the Labor Department’s closely watched monthly employment report, which economists anticipate will show hiring decelerating to 391,000, unemployment inching down to 3.5% and year-over-year wage growth cooling to 5.5%.
The number of U.S. workers filing first time applications for unemployment benefits edged up more than expected last week to an even 200,000, according to the Labor Department.
The number landed well above the 182,000 consensus and touched the lowest extreme of a range associated with healthy labor market churn.
But as Rubeela Farooqi, chief U.S. economist at High Frequency Economics, is quick to point out, jobless claims remain “close to multi-decade lows.”
“Acute imbalances between supply and demand should limit the number of layoffs, for now,” Farooqi adds.
That imbalance is evidenced by the most recent job openings number hovering near record highs even as the jobless rate has returned to pre-pandemic lows. There are about two open positions for every unemployed American.
Ongoing claims, reported on a one-month lag, edged down to 1.384 million, sinking further below the pre-pandemic 1.7 million level:
Announced job cuts at U.S. firms grew by 13.6% in April to 24,286, marking the second straight monthly increase and, along with claims data, hinting at easing reluctance at American companies to hand out pink slips.
Still, a report from executive outplacement firm Challenger, Gray & Christmas’ (CGC) showed year-to-date planned layoffs struck an all-time low compared with the same time frame in past years.
“Job cut plans appear to be on the rise, particularly as companies assess market conditions, inflationary risks, and capital spending,” writes Andrew Challenger, senior vice president of CGC. “Despite this, job openings are still at record highs. Workers who are being cut will have lots of opportunities and will likely land quickly.”
So far this year, healthcare has overtaken services and entertainment/leisure as the sector with the most job cuts as the COVID crisis abates and restrictions are lifted:
But the Labor Department offered further evidence of jobs market tightness with its preliminary take on first-quarter labor costs and productivity.
In the first three months of 2022, labor costs jumped by 11.6%, hotter than analysts expected, while productivity – a measure of output per worker hour – plunged by a steeper than anticipated 7.5%, the biggest decline since the Andrews Sisters made the top 40 (1947, to be exact):
And while hourly compensation posted a robust 6.5% gain, when adjusted for inflation that number actually dropped by 1.4%.
“We expect output to rebound strongly and hiring to slow, so productivity will jump and unit labor costs will either slow or fall outright,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics.
For a look at the relationship between job opening and employment costs, here’s a chart that compares the two:
Wall Street is in severe sell-off mode in morning trading, with major U.S. stock indexes either deeply cutting into, or completely erasing, the post-Fed rally on Wednesday.
The usual suspects – interest rate sensitive, market leading growth stocks – are the heaviest drag.
EARLY TRADE HANGOVER (1008 EDT/1408 GMT)
U.S. stocks are looking a bit bloodshot in early trade on Thursday, a day after the Federal Reserve’s less aggressive tone sparked a bullish binge.
Indeed, major indexes are solidly red with the S&P 500 quickly erasing more than half of Wednesday’s 3%-surge.
Consumer discretionary is taking the biggest hit among major S&P 500 sectors. FANG stocks are especially weak with the NYSE FANG+TM index sliding more than 4%, which has completely erased its Wednesday thrust.
Energy is just above flat. This with NYMEX crude futures popping back up above $110, to a more than one-month high.
Meanwhile, the U.S. 10-Year Treasury yield is continuing its march higher. It hit 3.0503%, a fresh-high back to November 2018.
Here is where markets stand in early trade:
S&P 500 INDEX: TRADERS ON JURY DUTY (0900 EDT/1300 GMT)
The S&P 500 index had a post-Fed party of Wednesday, ultimately closing up 3% on the day, for its biggest one-day percentage rise since May 18, 2020.
That said, despite the strong rally, traders may need greater proof to confirm a more enduring SPX turn to the upside:
Going into Wednesday’s session, the SPX was down about 13% from its January 3 record close. The benchmark index was also trading about 7% below its 200-day moving average (DMA), which can be considered a proxy for the long-term trend.
Of note, looking back to late 1928, 72% of the 100-biggest down days in the SPX have occurred with the SPX ending the prior session below its 200-DMA.
However, it is also important to consider that over this same period, 78% of the 100-biggest up days in the SPX have also occurred with the benchmark index ending the prior session below the long-term average.
Heightened volatility amid periods of market stress is a likely driver for outsized gains and losses. Therefore, traders will want to weigh other evidence, which can include action vs key levels and momentum, as well as market internals. This, in order to add credence to the significance of an upside turn, beyond what may prove to be just a one-day wonder.
For example, although the Nasdaq Composite also surged on Wednesday, rallying more than 3%, the Nasdaq New High/New Low index fell for a 9th straight day to a reading of 7.4%. On the plus side, that is this measure’s lowest reading since a 6% print on January 28, suggesting the Nasdaq may well be at, or near, washed-out levels. That said, the fact is this measure is still weak, and yet to bottom.
In any event, in Thursday’s premarket trade, CME e-mini S&P 500 futures are not showing upside follow-though. They currently stand down around 0.7%.
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)