The finance industry’s mood is so grim heading into U.S. earnings season that any positive surprise will likely result in a strong bounce for stocks.
Both Scotiabank and RBC Capital Markets published bearish reports on Wednesday. In the latter case, U.S. equity strategist Lori Calvasina cut her year end 2022 forecast for the S&P 500 to 3800, 400 points lower than her previous target.
Scotiabank strategist Hugo Ste-Marie used the dire title EPS Breadth Deteriorating, No Support for Equities for his U.S. earnings season preview. Mr. Ste-Marie offered four reasons to be bearish.
The preliminary beat ratio – 27 companies have reported profits ahead of the official bank-led start to earnings season – has seen the weakest results since 2002.
Meanwhile, Scotiabank reminded investors that the strong U.S. dollar will hurt results for companies with overseas revenue, and noted that the macroeconomic backdrop was decelerating quickly.
Fourthly, the bank pointed out that strong results from the oil and gas sector are masking broader weakness.
Earlier this week, BofA Securities U.S. quantitative strategist Savita Subramanian noted that there has been a record number of negative earnings pre-announcements. “Guidance is likely to matter most, and we see substantial downside risk to 4Q and 2023,” the strategist added.
These are only recent examples. There has been a widespread rush to slash earnings and index targets in recent weeks. It’s tempting for investors to adopt a contrarian view – betting against Wall Street and Bay Street consensus has often worked as an investment strategy.
There is one bit of data, however, that will keep me cautious during earnings season. BofA Securities reported that their clients had piled over US$6-billion into asset markets last week, the third largest total since the financial crisis. Strategists might be bearish but the average investor remains extremely, and perhaps blindly, bullish.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
This stock market isn’t pivoting away from raising interest rates any time soon
Stock markets have a habit of obsessing over a single question and right now the question du jour is when the Federal Reserve, the world’s most powerful central bank, will start pivoting away from its take-no-prisoners attitude toward raising interest rates. The short answer: not nearly as soon as investors would like. Ian McGugan tells us more.
Also see:
Bridgewater’s Ray Dalio warns of a ‘perfect storm’ for economy
JPMorgan CEO Jamie Dimon says S&P 500 could fall another 20%
Ark’s Cathie Wood suggests Fed closer to ‘pivot’ as volatility rises
How ETF investors are blending stocks and bonds in a tough year
Talk about asset allocation is everywhere in investing. What you don’t see much is insight into what investors are actually doing. For some help on that, Rob Carrick looks at how exchange-traded fund assets have been invested.
Two time-tested dividend portfolios that offer value and low volatility
Autumn is traditionally a good time to buy stocks and plant investment seeds for the years to come. Thankfully for us, we have Norman Rothery here to outline two dividend buying portfolio strategies with appealing long-term track records.
What Scotia’s Greg Newman is buying and selling
While many investors hunkered down during the market downturn this year, hanging on to their positions and hoping for better days ahead, money manager Greg Newman has been aggressively selling. The portfolio manager at Scotia Wealth Management in Toronto is currently holding about 50-per-cent equities in his average portfolio, which is regularly a mix of 70-per-cent equities and 30-per-cent fixed income. Yet, he’s also of late doing some buying in beaten-down names. Brenda Bouw found out more.
The world needs cheap oil and gas. Are sustainable investments passé?
Sustainable investing is going through a rough patch, and this week’s announced production cuts by the Saudi-led OPEC+ energy cartel, which includes Russia, only added to the challenges that wind- and solar-loving investors are facing. Can sustainable investing survive this onslaught? David Berman explores the issue.
Global bonds move in lockstep, ramping up investors’ risk
Government bond prices around the world are moving in tandem, reducing investors’ ability to diversify their portfolios and raising concerns of being blindsided by market gyrations, as Reuters reports.
Investors, don’t succumb to the ‘cardinal sin’ of panic selling
Yes, the signs of stress are spreading across the global financial system at an alarming rate. No, this does not mean it’s a good time to bail on your investments. In moments of heightened financial peril, it’s a reliable reflex for retail investors to want to reduce their exposure to risky assets. After all, if you can see the storm approaching, why not get out of town? Unfortunately, this can be one of the worst mistakes an investor can make. Tim Shufelt explains.
Others (for subscribers)
Wednesday’s Insider Report: CEO invests over $1-million in this REIT yielding 7.3%
Wednesday’s analyst upgrades and downgrades
Tuesday’s Insider Report: Four executives make large purchases in this Big 5 bank stock
Tuesday’s analyst upgrades and downgrades
Globe Advisor
Canada’s disclosure rules for ESG investing critiqued for not going far enough
Tail risk ETFs protect against market meltdowns but is their effectiveness worth the cost?
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Ask Globe Investor
Question: I am hoping you could give me some advice about asset classes. I have 40 per cent of my portfolio in cash and I am lost on how to proceed forward. Should I leave the 40 per cent in cash, buy GICs/bonds, or dividend generating equities? I have never really experienced the environment we are currently in and need some guidance.
The balance of my portfolio is equally weighted in utilities, telecom, technology, and health care. I am approaching my 70th birthday and consider myself a medium risk type of investor.
As always, I appreciate your guidance. - Steve A.
Answer: If you are truly medium risk, then cross GICs and bonds off the list, albeit for different reasons. Some GICs are offering around 5 per cent right now if you shop around, but they require you to lock in your money for a specific period. As for bonds, the market is going through its worst downturn since World War II. Stand clear.
One area you did not mention was financials. The sector has been badly hit by weakness in the housing industry and fears of a recession. As of Oct. 7, the S&P/TSX Capped Financials Index was down about 16 per cent year-to-date.
As a result, yields for the major banks are very attractive. Bank of Nova Scotia (BNS-T) is yielding 6.35 per cent on a quarterly dividend of $1.03. That’s very high for a Big Five bank. Canadian Imperial Bank of Commerce (CM-T) yields 5.68 per cent, while Bank of Montreal (BMO-T) is at 4.71 per cent. Both Toronto-Dominion Bank (TD-T) and Royal Bank of Canada (RY-T) are yielding over 4 per cent.
On the insurance side, I like Sun Life Financial Inc. (SLF-T) with its quarterly dividend of 69 cents a share, to yield almost 5 per cent.
All the financial stocks were beaten up during the Great Recession of 2007-09. At one point, BMO was yielding over 11 per cent. People were nervous about the sector at the time but in retrospect it turned out to be a wonderful buying opportunity.
I think we’re seeing something similar this time around. The sector may drift lower over the next few months, but it will eventually rally and the current prices will look like great bargains.
I suggest you keep your cash in a high interest savings account (see ratehub.ca for the best rates). Gradually use some of that money to build a financials component within your portfolio, buying on dips. Two or three years from now, I think you’ll be pleased with the result. – G.P.
--Gordon Pape
What’s up in the days ahead
The Contra Guys explain why they aren’t giving up on their bullish case for General Electric. Plus, Tim Shufelt looks at what a ride it’s been this decade for the TSX.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff