Written by Lance Roberts, Clarity Financial
As my colleague Doug Kass pointed out on Friday:
Yesterday provided at least five reasons for the markets to decline:
- Federal Reserve Chairman Powell delivered a cautionary economic message for not only this year but for several years to come. To me, this renders the rosy EPS projections of the consensus, and many high-profile strategists (like my friends Dave Kostin and Thomas Lee) are unrealistic.
- There was mounting evidence that Covid-19 is still not tamed.
- Wells Fargo CFO John Shrewsberry said second-quarter loan loss reserves would be higher than in 1Q-2020.
- The Robinhood traders’ objects of affection, stocks of bankrupt companies, took a sudden dive. Silly speculation is almost always evidence of a maturing bull market.
- Technical signposts are flashing red: Investor sentiment has increased as stock prices rose as a bull market in complacency has quickly unfolded from the depths of March. Market breadth has started to wane.
I agree with Doug and have been well ahead of the media in lowering forecasts. As noted previously:
“Given the horrific data we now have coming in, we already know our previous estimates of $100/share were too high. A more realistic, and still overly optimistic 50-60% decline in earnings, makes current valuations even more challenging to support. (Using the chart and table below, you can pick your price and valuation level.) “
What is essential to understand is that while Fed liquidity is currently fueling a “bull market,” the “bear case” still has teeth.
Eventually, the market will fill the gap between “fantasy” and “reality.”
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