Valens Research US Market Phase Cycle - January 2020
Sentiment indicators are flashing short-term warning signals. The S&P 500 had almost a pause-less 15% rally from early October through mid January. A combination of fundamentals re-accelerating and muted sentiment indicators primed the market for a move higher. But now sentiment indicators have grown overly bullish, which may lead to more volatility in the near-term. That being said, as the factors below explain, any dip presents a buying opportunity
Corporate earnings growth, the core driver of equity market appreciation, appear to be reaccelerating. Corporate profitability has risen each year since 2016 when as-reported accounting distortions are removed. Uniform ROA is forecast to maintain all-time high levels of 12%+ through 2019 and 2020. Uniform Earnings growth is forecast to accelerate to 12% in 2020, in line with 2017-2018 levels. A positive inflection in management's confidence in investing, and reduced concern about their outlook and margins, point to reasons that they may be able to deliver on these forecasts. This may drive earnings acceleration that the market is not yet pricing in, facilitating fundamental equity upside
A recession cannot occur without a negative credit event and credit destruction. The corporate credit outlook and recent Fed actions signal no near-term risk of a credit event. In Q3 2019, credit lending standards tightened for the first time, outside of Q4 2018, since the energy crisis of 2016. This can often be a very early (2-4 years early) signal of a coming credit issue and recessionary risk. But the recent declines in the corporate cost to borrow and the Fed cutting rates significantly have enabled a more favorable refinancing environment recently, reducing risk from debt maturity headwalls. Credit tightening this late in a cycle is expected, but credit fundamentals limit the potential market overhang