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Morning Notes — Curve Steepening

Curve Steepening

February 1, 2021

CQ4: Q4 earnings season is trending better than expected with ~85% of S&P 500 companies beating consensus earnings vs. an average of ~70% over the last four quarters.  Revenues are also better with ~79% ahead of estimates vs. an average of ~61% over the last four quarters.  Favorable earnings this quarter haven’t translated into higher share prices, but is reducing concerns around stretched valuations as consensus 2022 SPX EPS estimates drift toward $205.  At current levels, this implies an 18x forward multiple vs >20x at the end of the quarter. Btw, Communication Services is the only sector seeing favorable post-earnings returns.  Financials, Energy and Tech sectors are seeing the largest earnings beats, while Tech, Materials and Energy are seeing the largest revenue beats.

SPX: Decelerating price trend momentum in the S&P 500 at ~3850 was followed by concerns of hedge fund deleveraging three days later.  If the mechanical challenges stay contained within the Equity Long/Short hedge fund community, the deleveraging process shouldn’t create a sustained drawdown.  In the context of a fast cyclical recovery, a technical pullback like this should first be considered a buying opportunity, but that doesn’t mean there won’t be aftershocks.  The SPX has strong technical support in the ~3600-3650 range that we expect will hold, while a sustained break below ~3500 would indicate a change in trend.  The Nasdaq 100 has similar support in the 12200-12500, but that’s not where we’re focused at the moment.  The most compelling group remains the constituents in the S&P 500 Value Index (SVX) with the yield curve continuing to steepen. The 5-year/30-year spread has widened to 141bps currently, which puts Financials at the top of our list followed by Industrials and Materials.  Use this as an opportunity to increase exposure.  And even Energy will work once a path to reopening becomes more broadly visible. 

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