Yesterday, JPM’s Adam Crisafulli explained the simplistic explanation why according to his trading desk, the JPM is headed promptly toward Goldman’s 2017 year end target of 2,200: $130 in EPS and a 17x multiple. This morning, Crisafulli shifts from the quantitative and focuses on the qualitative, laying out the three narratives that explain the persistent equity bid.
From JPM’s Early Look at the Markets
Three narratives are at work presently and explain the persistent equity bid:
- relative valuations. While yields have ticked off their lows investors are confident they won’t have dramatic upside and thus are increasingly comfortable buying into the relative valuation argument (equity PEs vs. TSY yields). Domestic economic trends are healthy and in a vacuum would prob. justify a Fed policy mildly more hawkish than it currently is but the effects of int’l trends will continue to act as a ceiling for US yields. Just a few weeks ago investors considered 16.5-17x to be extremely stretched but lately psychology has evolved w/the latter half of that range thought to be a base (this could all wind up being nothing more than an ephemeral excuse made by sidelined money to justify chasing the SPX at alltime highs but the media at least has shifted pretty dramatically in the last few days to where PEs are now being considered more relative to Treasuries instead of on an absolute basis);
- earnings confidence. It is still very early in the CQ2 season but indications so far are more positive than negative (AA, Daimler, PEP, Samsung, SIMO, STX, WDC, etc) and this is helping to bolster confidence around a ~$130 number for ’17 (and 17x the $130 figure points to a ~2200 SPX);
- rotation. The most dramatic feature of the Tues session was the rotation that occurred beneath the surface as traditional safe-havens (utilities, REITs, telecoms, staples) not only underperformed but saw outright selling too. On the flip side cyclicals and financials did very well (banks, brokers, asset managers, tech hardware, semis, materials, autos, airlines, etc). Investors are hesitant to embrace the rotation given so many false starts these last several months but money is beginning to respond.
At the moment the relative valuation narrative and the rotation theme are coexisting and eventually the two will come into conflict w/one another but that would require a dramatic increase in yields (i.e. a quick spike in 10yr TSY yields to ~2%). Bottom Line: equities have a lot of momentum and investors are much more willing to make the relative valuation argument w/respect to multiples to justify an SPX up to 2200 at least. However, the tape’s absolute multiple shouldn’t be ignored and the SPX has struggled historically to sustain a PE in the high-teens or higher w/only a few brief exceptions (granted the rate environment now is dramatically different than it’s been).
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Alas, JPM forgot the one and most important narrative that explains not only the recent equity bid, but the bid ever since 2009: central banks.
via http://ift.tt/29D1yz0 Tyler Durden