Valens Research US Market Phase Cycle - July 2019
The main structural risk overhanging the market is the credit cycle, and likely pending Fed rate cuts appear to be deferring this overhang. Without a negative credit cycle, earnings growth and stock price appreciation can continue. The yield curve inversion earlier in 2019, and corporate credit headwalls looming in 2019 had been the potential risk that could cause warranted volatility as the market enters 2020 and heads to 2021. With the Fed increasingly likely to cut rates, and corporate cost to borrow already declining, the probability of an improved refinancing environment has increased significantly. That removes this potential overhang to the market.The core driver of equity market appreciation is corporate earnings growth. Corporate profitability has risen each year since 2016 when as-reported accounting distortions are removed. Uniform ROA is forecast to reach all-time high levels of 12%+ in 2019 and to improve even further to 13% in 2020. Uniform Earnings are forecast to grow 11% in the next two years. Continued earnings growth warrants continued bull market tailwinds.
Corporations are reaching a likely positive inflection in capital investment trends. Capital investment has been below trend the past several years, running at around 6%, below longer-run 8%-9% levels. However, several factors point to this changing in 2019. After years of under-investment, corporate PP&E is starting to rebound from very old levels relative to history, pointing to accelerating growth. At the same time, management teams remain more confident about investing in growth, giving reason to expect the investment to come. Investment and balance sheet growth generally leads earnings growth.
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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