US equity earnings season starts on Thursday with financials.
Many people are looking to economic data, technical levels or markets like bonds to determine if we're at an inflection point. For me, the tell is always in sentiment.
Markets always bottom well before the economic data as investors flee and pessimism reigns. The word 'recession' is on the tip of everyone's tongue and sentiment around Europe is brutal.
If Russia cuts off European gas we could see a real rout but otherwise, there are signs that the worst is already priced in.
For earnings season, no one believes the analyst numbers. Here's a survey of institutional investors from Scotiabank.
This earnings season will be a clear case of the difference between 'analyst expectations' and 'what's priced in', with the latter being much more bearish.
I think we got a preview at the start of the month when Micron took down its Q4 revenue guide to $7.2 billion, far short of the $9.15 billion consenus. What happened? Shares initially fell in the pre-market but the buyers quickly waded in and it closed above the openingi levels, then rallied the next day and has continued to climb.
Another sign of just how bad it is comes from Bank of America and its Bull & Bear Indicator. It's at zero. It doesn't get any worse than that.
Even today we have seen a long list of bearish news developments but the S&P 500 is only down 26 points, or 0.5%. And that's coming off a strong week last week.
What it comes down to is what the 'recession' looks like. I believe that when the current generation of investors hears that word they think of the financial crisis and the pandemic rout but I maintain that it will be much milder and the job losses will be light.
CIBC offers a clue about what's coming next, calling it a 'noncession'.
"This noncession, and a parallel slowing globally, may have opened the window a bit for the Fed to back away from its most hawkish projections, after what’s likely to be another 75 basis point hike this month," they write.
If that comes it will be a flashing green light to buy risk assets.
