[Reading the United States] CICC Research Liu Gang: Where did the U.S. stock market fall?

Liu Gang, Managing Director and Strategy Analyst of CICC Research

　　Zhongxin Finance, May 19 Question:

　　The authors are Liu Gang, managing director of the research department of CICC, strategic analyst, etc.

　　The turmoil in U.S. stocks and major assets has continued recently.

Before inflation has seen an effective inflection point, the market is worried that the Fed's "last resort" tightening too quickly may bring more pressure on growth and earnings, which is particularly evident in the sharp drop in the prices of major resource products, which in turn leads to US debt Interest rates have eased, back below 3%.

U.S. stock market consensus earnings expectations have been lowered

　　Coinciding with the first quarter performance period of U.S. stocks, the weak guidance for future growth of major U.S. stocks, especially leading technology and multinational companies with a high proportion of overseas revenue, aggravated and even amplified the market’s selling pressure. In addition to cost pressure, it is also not unrelated to the chain reaction caused by the escalation of the epidemic.

　　In fact, to a certain extent, this situation is also consistent with the characteristics of other recent macro data in the United States. For example, the ISM manufacturing PMI (purchasing managers' index), which reflects more large enterprises and external demand, is also weaker than that of small and medium-sized enterprises and internal demand. The Markit PMI index of demand, especially new orders and export orders; US GDP net exports in the first quarter was a significant drag, while domestic consumption and investment still accelerated; US domestic industrial output and capacity utilization, the job market is still repairing, etc.

　　As of now, about 94% of U.S. stock companies have disclosed their first-quarter results.

From a preliminary summary, the first quarter EPS (earnings per share) growth rate of the S&P 500 and Nasdaq was 9% and 16% year-on-year, which was significantly lower than the 32% and 39% in the fourth quarter of last year. have a direct relationship.

However, although 78% of the companies still exceeded expectations, the rate of exceeding expectations fell further.

At the sector level, the growth of energy, raw materials and other sectors benefited from price increases, but the growth rate of financial sectors such as retail and banking turned negative in the first quarter.

　　But whether it is domestic demand or external demand, from the results, the slowdown in external demand and the increase in pressure also make it difficult for the United States to be immune, especially for leading companies with a high proportion of overseas revenue, the impact is even greater.

At present, following the weakening of the future growth guidance of listed companies, the consensus earnings expectations of the US stock market have also shown early signs of a slight downward revision, and the market's earnings adjustment sentiment has also weakened, but this trend is not yet significant.

Further, the market is essentially concerned that the Fed may not be able to control inflation with "just right" tightening without hurting growth, a so-called "soft landing".

　　At present, the growth of the United States itself is not that bad, and domestic demand still has some resilience, but the potential risks may come from the drag from external demand and the pressure on growth from the Fed's tighter financial conditions.

Therefore, the Fed's policy and inflation path, and the prospect of China's stable growth policy are also equally important to stabilize the growth expectations of some US stock markets.

U.S. stocks show signs of partial oversold, but may not be particularly extreme

　　After the recent sharp correction, the U.S. stock market has shown signs of pessimism and oversold to a certain extent, but it may not be particularly extreme, as reflected in the following aspects:

　　First, the valuation is close to the average: the current 12-month dynamic valuation of the US stock S&P 500 index has dropped to 16.5 times, which is close to the long-term historical average of 16.2 times. This level is not low, but lower than the 18 times before the epidemic at the end of 2019. , also close to levels seen before market volatility at the end of 2018.

The second is the degree of oversold: the U.S. stock and U.S. bond markets are approaching the oversold range.

Third, sentiment is relatively sluggish: the put/call (call option/put option) ratio of U.S. stocks has nearly doubled the standard deviation above the historical record, while individual investor sentiment in the U.S. has fallen to its lowest level since 2011.

　　Therefore, on the whole, after the recent correction, the U.S. stock market has indeed included certain pessimistic expectations, but it is not very extreme from the perspective of valuation, sentiment and technology, and the valuation level is statically based on the current growth. And the liquidity environment can not be used as the main support.

　　According to the five methods of risk premium, relative attractiveness of stocks and bonds, and return on investment, when the 10-year U.S. debt reaches about 2.9-3%, the impact on U.S. stocks will be more sensitive, and it is basically the same from the current situation. .

Judging from how well the valuation matches the current growth (PMI index) and liquidity environment (the level of U.S. bond interest rates), the current actual valuation level is still lower than the level implied by the model.

In other words,

.

　　From a purely technical point of view, the next weekly support for the S&P 500 is around 3,870, while the Nasdaq has already broken through its support level. It is not enough to superimpose the valuation levels and sentiments analyzed above. It is extremely extreme, so relying solely on valuations and sentiment support may not be enough.

Looking forward, the stability and improvement of sentiment will depend on the temporary suspension of US bond interest rates and, more importantly, the stabilization of growth expectations.

Therefore, before this, the market does not rule out maintaining consolidation or even turbulence in the short term.

　　(Liu Gang, CFA SAC License Number: S0080512030003 SFC CE Ref: AVH867)