Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO bank analyst Sohrab Movahedi previewed earnings for his sector and provided top picks,
“The Q3/24 earnings season kicks off Aug. 22 with TD. “Big 5″ (excl. BMO) cash earnings are expected to be up ~3% y/y (high single digits at CM and NA but declines at BNS), reflecting mid-single-digit pre-tax pre-provision earnings growth coupled with still elevated but stable credit provisions. Our estimates contemplate some firming in Capital Markets/Wealth revenue, moderating expense growth with benefits from last year’s restructuring charges and mid-single-digit loan growth (helped by the full-quarter benefit from the HSBC Canada acquisition at RY). We believe that the regulatory capital inflation is behind us (removing an ROE headwind), and that the Canadian banks are at an inflection point with an improved earnings visibility. At current valuations, we view pull backs in the stock prices of our Outperform-rated names (CM, RY, NA, and EQB) as a buying opportunity”
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BofA Securities U.S. equity and quant strategist Savita Subramanian recommends investors thread the needle a bit by avoiding bvoth megacaps and small caps,
“Semis are the best performing group this year by far, up 46ppt, and are tracking a 36ppt EPS revision. Autos are down 17%, mostly from multiple compression (-15ppt) … The S&P 500 ex-Magnificent 7 – or the S&P 493 – is now on track to grow earnings by 8% YoY in 2Q, marking the first quarter of growth for this cohort since 4Q22. But small caps remain in an earnings recession that began in 4Q22 with S&P 600 earnings down 11% YoY so far in 2Q. And rising recession concerns hit small caps harder if history is a guide … Even with mega-caps leading the market lower in the recent pull-back, the equal[1]weighted S&P 500 is trading at an extreme discount to the S&P 500, approaching Tech Bubble levels (Exhibit 1). Admittedly, the equal-weighted S&P 500 is 8% more expensive than the Russell 2000 vs. a 1% historical average … Based on the current equity risk premium, the equal-weighted S&P 500 should trade at a premium to the S&P 500 and should trade at a 12% premium to the Russell 2000, all else equal”
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Barclays strategist Venu Krishna how drastically systematic funds like volatility control portfolios, which add cash automatically when index risk climbs, and algorithmically-driven Commodity Trading Authority (CTA) funds have deleveraged,
“Systematic funds deleveraged sharply; are they done? Given the sharp rise in volatility, Vol Control (VC), CTAs and Risk Parity (RP) [definition here] funds have all delevered meaningfully. Indeed, VC equity allocation has fallen from c.110% to ~50%, while RP equity exposure is now near its bottom quartile. Similarly, CTAs have embraced the risk-off by cutting equity/commodity longs, while adding to bonds. Going forward, CTAs will likely continue to sell NKY[ Japanese stocks] & buy JPY [yen currency] under most market paths. However, within US equities, where they are neutrally positioned, long-term trends remain favourable, creating a higher bar for CTAs to turn meaningfully short. Overall, given the extent of deleveraging, further selling pressure from systematic funds (esp. Vol Control) will likely be constrained. Instead, should markets stabilise and data prints turn more benign, the funds are likely to add to the buying pressure more meaningfully”
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Diversion: “Video games and looks” – Marginal Revolution