Jul 6, 2020

Axios Markets

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🎙“In the fields of observation chance favors only the prepared mind." - See who said it and why it matters at the bottom.

1 big thing: Analysts slash earnings forecasts, ramp up price targets
Data: FactSet; Chart: Axios Visuals

Despite cutting expectations for companies' earnings by the most in history and revenue by the most since 2009, Wall Street analysts are getting increasingly bullish on the overall direction of the U.S. stock market.

What's happening: Equity analysts are expecting earnings in the second quarter to fall by 43.8% — the most since 2008's fourth quarter 69.1% decline.

  • They also project earnings this year to decline by 28.6%, the largest decrease in the annual EPS estimates for the index over the first six months of the year since FactSet began tracking the data in 1996.
  • Revenue estimates, too, have been cut back significantly, with year-over-year revenue expected to fall 11.2% in Q2, which would mark the steepest decline since Q2 2009 (11.5%).

Of note: Through Thursday, 185 S&P 500 companies had withdrawn or confirmed a previous withdrawal of annual EPS guidance for fiscal year 2020 or FY 2021 and just 49 have issued EPS guidance for Q2 2020.

  • The number of companies issuing EPS guidance to date for Q2 2020 is less than half the 5-year average for a quarter of 106.

On the other hand: Price targets for the S&P have steadily risen in recent weeks with data now showing the average bottom-up, year-end target price is 3328.37 — 6% above the index's current level, FactSet senior earnings analyst John Butters points out in note to clients.

  • Of the 10,356 analyst ratings of individual S&P companies, 52.7% are buy ratings, 41.1% are hold ratings, and 6.2% are sell ratings.

Between the lines: The expectations for higher stock prices also defy already frothy valuations.

  • The S&P 500's forward 12-month price-to-earnings ratio is 21.8, well above the index's five-year average of 16.9 and 10-year average of 15.2.
  • At the end of the first quarter, the S&P's forward 12-month P/E ratio was 15.6.

By the numbers: "Since the end of the first quarter (March 31), the price of the index has increased by 20.6%, while the forward 12- month EPS estimate has decreased by 12.7%," Butters notes.

2. Consensus grows about the Fed's impact on equities
Data: Federal Reserve; Chart: Axios Visuals

Minutes from June's meeting of Fed policymakers was released on Wednesday and showed the central bank is still ready to provide support “for some time” to markets.

Why it matters: With coronavirus cases rising, recent economic data largely moving backwards, and companies' earnings and revenue guidance slipping, the Fed looks to be the driving force behind the march upwards of stock prices.

By the numbers: From February to the end of June, total assets held by the three major central banks (ECB, Fed, BOJ) soared $5.6 trillion to a record $20.1 trillion — with the Fed now holding over $7 trillion, data from Yardeni Research show.

What they're saying: The Fed is using "financial engineering, in a highly levered manner, to indirectly influence equity prices," Vineer Bhansali, CIO of LongTail Alpha, writes for Forbes.

  • “As long as the Fed has the authority to buy assets, print money, and underwrite risk taking, as it currently has, don’t fight the Fed. But be ready to bail out as soon as they start thinking about thinking about raising rates.”

One level deeper: “Today the economy and the markets are driven by the central banks and the coordination with the central government,” Bridgewater Associates founder Ray Dalio said at the Bloomberg Global Asset Owners Forum Thursday.

  • As a result, “capital markets are not free markets allocating resources in traditional ways.”

The big picture: Value metrics like P/E ratios must be re-evaluated in light of the current situation, Ed Yardeni, president and chief investment strategist of Yardeni Research, writes in a note to clients.

  • "What should the forward P/E of the S&P 500 be when the federal funds rate is zero, the 10-year US Treasury bond yield is below 1.00%, and the Fed is providing plenty of liquidity to facilitate the resulting rebalancing from bonds to stocks?"
  • "Frankly, we don’t know the answer to this question, since there is no precedent for the current situation."
3. Catch up quick

Uber's board of directors has approved a $2.65 billion acquisition of Postmates in an all-stock deal, expected to be announced today. (Bloomberg)

Cellphone and foot traffic data show fewer Americans are patronizing local businesses and chain stores since mid-June. (CBS News)

The alarming rise in coronavirus cases in the U.S. isn't due to increased testing — particularly not where cases have grown fastest over the last month. (Axios)

4. The myth of closing the racial wealth gap through increased savings

Reproduced from the Federal Reserve Bank of Cleveland; Table: Axios Visuals

An oft-suggested reason for the massive wealth gap between Black and white families in the U.S. is that Black Americans simply don't save or invest enough.

  • Data show that is untrue.

What they're saying: A 2004 study by Maury Gittleman and Edward N. Wolff, using data from the Panel Study on Income Dynamics (PSID), tracked the financial position of Black and white families and found that if income is controlled, there is "a slight savings edge for Black households."

What's really happening: "The current racial wealth gap is the consequence of many decades of racial inequality that imposed barriers to wealth accumulation," the Cleveland Fed noted in a 2019 report.

  • And while white Americans' head start in amassing wealth plays some role in the wealth gap, the primary driver for its continued presence is "persistent systemic differences in economic opportunity."

Why it matters: "As of 2016, the most recent year for which data is available, you would have to combine the net worth of 11.5 black households to get the net worth of a typical white U.S. household," the Washington Post wrote recently.

  • "The 2016 wealth gap is roughly the same as it was in 1962, two years before the passage of the Civil Rights Act of 1964, according to data from the Survey of Consumer Finances (SCF)," the Cleveland Fed wrote.

Yes, but: While Black families may save more, they tend to invest in lower risk assets that produce lower returns.

Yes, but, but: Even if Black investment patterns mirrored their white counterparts, that would close the wealth gap by just 4 percentage points, according to the 2004 study by Gittleman and Wolff.

5. Twice as many unemployment claims as unemployed people

Data: Department of Labor, Bureau of Labor Statistics; Chart: Andrew Witherspoon/Axios

Thursday's jobs report from the Labor Department showed the U.S. added nearly 5 million jobs in June, leaving 17.8 million people unemployed, but the Labor Department also reported that more than 31 million people were receiving unemployment benefits and an additional 6 million had applied as of June 27.

What happened: The CARES Act allowed for Americans who would not typically be eligible for unemployment assistance to qualify for benefits under the Pandemic Unemployment Assistance (PUA) program, including part-time workers and the self-employed.

  • Over the past month, as municipalities around the nation have removed "stay at home" orders, the number of people receiving PUA has swelled, from 9.7 million on May 23 to 12.9 million — the opposite of what was expected.
  • Additionally, at least 1 million Americans have filed jobless claims for 15 straight weeks.
  • The number of people approved for and receiving traditional unemployment benefits declined by less than 1 million from May 16 to June 13, the last date for which data was available.

What it means: The decline in unemployment seems to largely be the result of classification rather than an improved jobs market — people who had been classified as unemployed are returning to work but those who are now losing their jobs because of the coronavirus pandemic are often classified as "out of the labor force," not unemployed.

  • "In June, there were 17.8 million workers who were officially unemployed, but there were an additional 2.0 million workers who were temporarily unemployed but who were being misclassified as 'employed not at work,'” Economic Policy Institute economists Heidi Shierholz and Elise Gould write.
  • "And 5.0 million who were out of work as a result of the virus were being counted as having dropped out of the labor force. Altogether, that is 24.5 million workers who are either officially unemployed or otherwise out of work as a result of the virus."
  • "If all these workers were taken into account, the unemployment rate would be a whopping 15.0%."

Thanks for reading!

Quote: “In the fields of observation, chance favors only the prepared mind."

Why it matters: On July 6, 1885, French chemist and biologist Louis Pasteur administered a rabies vaccine to Joseph Meister, a 9-year-old boy who had been attacked by a rabid dog. The boy survived and avoided contracting rabies.

  • Pasteur also developed the process of pasteurization, in which a liquid is boiled and then cooled to kill the bacteria that cause the souring, and his work led to vaccinations being developed for diseases including anthrax, tuberculosis, cholera and smallpox.