Investors may baulk at weak US earnings
Stocktake: Proinsias O'Mahony looks at the markets
US earnings season began yesterday, and numbers are not expected to be strong.
Eight out of 10 sectors have seen estimates decline since April; only four sectors are projected to report increased earnings; and the negative-to-positive earnings pre-announcements ratio is at levels unseen since 2001. Of late, investors haven’t cared. According to FactSet, companies that issued negative guidance in the last quarter actually eked out small gains immediately afterwards.
It may be, of course, that investors were not surprised, and that the news was already priced in. However, that seems unlikely. For one, over the last five years, negative announcements were followed by average falls of 1.2 per cent.
Secondly, companies that issued positive pre-announcements in the last quarter recorded average gains of 3.2 per cent, above the average seen over the last five years.
Investors were likely swept along by the overall market euphoria, and simply shrugged off bad news. With sentiment less buoyant of late, following Ben Bernanke’s tapering comments, investors may prove less forgiving towards weak earnings.
Golden opportunities unlikely
Gold investors enjoyed some respite last week, following the last quarter’s 23 per cent decline – the worst quarterly performance on record.
Despite the drop, there’s little talk of a bottom. Danske Bank, for example, sees a $1,000 gold price within three months. Gold sentiment among newsletter writers recently hit all-time lows, while hedge funds are betting on further declines – the number of short bets against gold is at near-record levels.
The fundamental arguments against gold – rising bond yields, low inflation and a valuation that many say remains rich compared to historical averages – are strong. However, with sentiment so ugly and technicals so stretched, a counter-trend bounce would not be surprising, says Barry Ritholtz of Fusion IQ.
However, he warns that any such bounce is unlikely to have a “happy ending”, with further lows ultimately awaiting.
“The bull market is broken, the prior narrative has utterly failed, and is no longer taken seriously, except by yellow metal jihadists and other assorted suckers.”
Still plenty of fight left in bull market
Legendary investor John Templeton famously said bull markets “are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”. According to Merrill Lynch, there’s still no sign of euphoria on Wall Street.
Bullishness among strategists hit a 13-month high in June, Merrill admits, with an average recommended equity allocation of 49.8 per cent – up from the all-time low of 43.9 recorded a year ago. However, that remains way below historical weightings of 60-65 per cent.