Valens Market Phase Cycle Monitor & Corporate Credit Macro View - July 2018
The term goldilocks often gets overused in financial markets. There just are not many other adjectives that explain an environment where things are positive, but not so positive that the market gets overheated, the “not too hot, nor too cold†phenomenon, quite as succinctly.That being said, when looking across fundamental, valuation, sentiment, and equity indicators as we enter the heart of the Q2 earnings season, goldilocks certainly feels like an appropriate adjective to use.
After significant volatility in investor sentiment for the past five months, from overly negative in February and parts of March and April to overly positive in early June, most investor sentiment indicators are currently at neutral levels, neither “too hot, nor too cold.†This reduces risk for positive or negative market surprises.
As we enter Q2 earnings season, forecasts for ROA' remain for a steady improvement, with UAFRS-adjusted EPS projected to rise by 14% in 2018 and 13% in 2019, pointing to robust fundamental growth. This provides strong underlying support for a healthy market.
While growth is forecasted to be favorable, markets are not pricing this in. At current valuations, markets are pricing in earnings to grow a much more modest 4% relative to 2017 levels over the next several years, with a V/E' of 19x.
Strong corporate fundamentals and limited credit risk are keeping this market from cooling off too much. At the same time, modest valuations keep the market from overheating, as do neutral sentiment indicators. The market certainly does feel “just right†for appreciation as we head into the back half of 2018.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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