(EU)phoria: Taking Profits

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IN THIS PUBLICATION:

• European markets have moved too far too fast since the bottom in October.
• Keep an eye on the US 10-Year Yield and the US Dollar, as their recent moves, if sustained, might lead the market to roll over.
• The case for a pivot in 2H2023 just got a little weaker.

Trading Around Technicals

• US 10-Year Yields: One of the most closely followed macro indicators around the world has bounced higher from an important technical support level. It’s important to see if the move higher can be sustained or not as it may help time the (potential) equity market rollover.

• Earnings Season: Over 70% of S&P 500 companies have posted results – so far, earnings have fallen around 2.8% year-on-year (slightly better than consensus -3.3% estimates). Big Tech missed consensus estimates by 8%, according to Bank of America, but despite that, it has been outperforming recently (in line with general market enthusiasm – more on this below).

• The bounce higher in yields has increased the spread between yields (inverted) and tech (which are usually negatively correlated), and if yields continue to move higher, I doubt tech’s outperformance can continue.

• Earnings Recessions: Year on Year growth of S&P 500 Earnings per Share went negative last week. According to Morgan Stanley’s Mike Wilson: “This has only previously happened 4 times over the past 23 years. In each prior instance (2001, 2008, 2015, 2020), equities have faced significant price downside associated with the shift from positive to negative earnings growth... historically, the majority of the price downside in equities comes after forward EPS growth goes negative." Yes, this is the most widely expected recession in history, but given the recent rebound in equities (driven primarily by central banks' perceived dovishness and the hyper-financialization of markets today – as opposed to a focus on fundamentals), the case for more downside continues to grow.