Why the market sell-off has entered a new phase
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How much are you willing to pay? So much for defensive plays. Consumer Staples reacting so poorly to Walmart and Target, and Thursday to Kohl’s , which cut its fiscal 2022 earnings, tells you there is additional growth and earnings risk out there. Investors have commonly believed that the Federal Reserve’s interest rate hikes were priced into the market. We can now see that Wall Street analysts haven’t begun to consider the earnings risk and investors have not adequately priced in growth risks (recession). Earnings estimates for 2022 remain remarkably high, with analysts overall expecting a roughly 9% increase in earnings over 2021, and an additional 10% gain for 2023: S & P 500 earnings estimates 2021 $208.12 2022 $228.58 2023 $251.06 Source: Refinitiv But that is going to change. Two of the most successful companies worldwide, Target and Walmart have spoken out to say they’re having difficulty managing inventory and costs. This is a major problem that Target and Walmart have, which the market believes will affect everyone. How will this affect the market? Analysts will begin to reduce, but the market will already have moved by the time that they’ve correctly sized their estimates. Which estimate is the best for earnings? Although it is impossible to determine right now, we can be certain that earnings will not rise by 9% this year. Assuming earnings remain flat this year, it is reasonable to expect that the market will drop an additional 9%. This assumes the multiple remains at 17x forward earnings. What is the definition of a bottom? This is impossible unless there’s evidence that inflation has topped, which we do not have yet. The only true indicator of real-time is commodity prices. They are not in the correct direction. Two observations: 1) Stock analysts are way behind the curve — unfortunately they don’t add any value when markets are at inflection point. 2) It is becoming increasingly difficult to believe that the “consumer will always be strong” myth is true. This story is expected to end by the autumn. Most of the consumers’ unmet demand for streaming will have been satisfied by September and October. Netflix has noted peak streaming. Next: Peak travel.
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