Tyler Durden: Last week, at the same time that Gartman was calling for a “bear market” set to push stocks to 1420-1500 and where “rallies are to be sold” (leading to a face-ripping market rally), Goldman finally capitulated on its year end 2100 price target for the S&P, downgrading both its EPS forecast for the S&P500 and its price target for US stocks for the next two years.
In addition to this being another clear interim market bottom call, what Goldman – which traditionally is at the forefront of the Wall Street penguin brigade – did, was to break the seal on bearish calls by all other sellside “strategists” who are nothing more than glorified trend followers, especially once they have the cover of Goldman. Which is also why we concluded our post from last week documenting Goldman’s call by saying “expect the rest of the sell-side penguins to follow shortly with their own year-end S&P price target “revisions” lower.”
Sure enough, moments ago Bank of America did just that when in a note by Savita Subramanian, the bank also known as the Bank of Countrywide Lynch as a result of its “successful” pre and post-bailout mergers, cut its S&P500 target from 2100 to 2000, saying “Today, we are further lowering our 2015 year-end target to 2000 (-5%) and are cutting our 12-month return forecast from 14% to 8% chiefly driven by a higher equity risk premium” apologetically adding that “while most of our models still point to further upside for US equities, we see increasing risks to our bullish outlook.”
And just like Gartman had a “bold” forecast earlier, so does BofA: “the next 12-18 months could see a rebound in global economic growth, or could see an economic shock.”
And just in case hedging every possible outcome in a world in which central banks have lost credibility isn’t enough, here is one more: “a third scenario might be something we have seen so far this year, significant downward revision by a thousand cuts, which has hardly been good for stock returns.”
In our fair value model, we revised our 2016 S&P 500 bull and bear case EPS from $142/$96 to $135/$95, which has brought our normalized 2016 EPS to $115 from $119 (-3%). We also raised our equity risk premium (ERP) assumption from 425bp to 450bp. As a result, the implied year-end S&P 500 fair value has gone from 2164 to 2000 (-8%). For next year, we now assume a flat ERP of 450bp from 400bp previously.
So S&P 500 EPS can be $135… or $95. Got it.
Done laughing yet? Good. Here is some more deep thoughts from BofA on the two perfectly hedged probabilities:
The bear case: an economic shock derails a fragile economy
Outside of an exogenous geopolitical event, an economic shock would most likely be tied to credit – and performance of the most credit sensitive economies, EM, reflects this building risk, in our view. Even in the US, with deleveraged household and corporate balance sheets, strains are still evident. While investment grade credit remains healthy, our high yield team expects fundamentals to further deteriorate, and the HY Distress Ratio, a good leading indicator, corroborates this view (Chart 3). Lower credit availability could continue to weigh on growth, which is already anemic – note that the number of companies with negative earnings has started to creep higher, another leading indicator of weak market returns (Chart 18). Corporations engineering EPS growth via buybacks has closed in on record highs (Chart 21), but longer term growth prospects may be challenged by their reluctance to reinvest in businesses (seen in depressed capex/R&D spend). Outside the US, the slump in commodity prices and manufacturing sectors may mean that expectations are not low enough, particularly in EM, which now make up over half of global GDP.
The bull case: a rebound in growth
The bull case is more aligned with our economists’ current outlook, where they see stable to improving growth in developed markets. This requires that China’s economy does not collapse. While this view has been increasingly challenged, the fact that sentiment and positioning remain very bearish suggests that much of the uncertainty is reflected in asset prices, and relief could result in a significant rebound in stock prices. The question becomes, at what price will investors step in and buy stocks?
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And now that Savita has done hedging her call just in case Gartman goes super bearish again and sends the S&P above 2,100 on short notice, here is the real bearish message:
The cycle map is broken: “Some signals suggest we have only recently passed the early part of the economic cycle, while other indicators argue we are much later in the cycle. Our checklist still suggests the cycle isn’t over, with more indicators still looking favorable than unfavorable, but some signal are starting to roll over and warrant close monitoring to determine if this really is the beginning of the end.”
So late-stage cycle coupled with “No near-term catalysts, near-term returns could be muted”
Given the current headwinds, we see few catalysts for a big rally over the next couple of months. Not only are the technical weak, but our Global Quant Strategists’ Global Wave model also suggests weak near-term returns. Additionally, as mentioned above, our short term estimate revision model just flipped back to negative, 3Q earnings results and commentary may be less likely to inspire confidence (consensus expects -3% y/y), the Fed lift-off has been delayed until December, we have yet to see meaningful improvement in global growth, and FX and commodity volatility is likely to remain elevated.
… even as “signs of stress are starting to percolate, particularly in the high yield market”
While “Outside of the US, most major economies have increased their leverage”
Decoupling again? “Global growth expectations have come down”
Hardly: “Many parts of US economy have already been feeling pain from weak demand & investment”