We are getting closer to finding a bottom but are a long way off from capitulation across the equity markets.
- Equity Bottom: We believe a bottom will not be found before the Fed achieves its QT run rate of $95 billion per month which is likely to occur around Labor Day.
- Recession: We expect the present recession to persist so long as elevated inflation persists. The consumer has started to retrench but we are only at the beginning of this process.
- Stagflation: Get used to this stagflationary environment as the Fed will not be able to tame inflation (this is giving the Fed the benefit of the doubt). The CPI will remain elevated at around 4% in the out years and growth will be muted given the U.S.’s enormous debt load and high input costs. Few took our stagflation prediction seriously last year, but now financial media is full of interviews with Ray Dalio, Scott Minerd, Mohamed A. El-Erian and others, all of whom acknowledge that stagflation is here. (Buy our book HERE).
- Earnings Estimates Are Too High: We sound like a broken record on this topic as well, but sell-siders need to take their numbers down. EPS estimates are coming down given higher input costs and limited topline visibility. Once that adjustment happens, companies won’t look as cheap on an EPS or Operating Income multiple basis (See our EPS article HERE).
- A Return of Fundamental Research: Time to dig into companies and the management teams that lead them. For example, while Value names have performed well this year, it will pay to own the best companies led by the best management teams (always a good investment strategy regardless of the backdrop), to maximize alpha over this next decade which will be marked by high prices and muted growth. It’s no longer enough to buy the narrative.