Summary
Valuation pressures are still high
Near 3% US 10-year bond yields have a lot to answer for, slashing the value of future cash flows and driving the stampede from expensive stocks, like tech. This has been worsened by no offsetting earnings pickup and with valuations starting high. Unfortunately, our ‘fair value’ model still shows valuation downside risks. Bond yields will not go to the moon and have their own limits but do likely move higher. These valuation risks keep us laser focused on cheap cyclicals, and the growth risks on defensives. It’s too early to bet on much tech relief.
High macro economic and earnings drama
End of worst month since the covid-crash saw volatile tech-led equities, and US dollar break key levels vs JPY, EUR, GBP. GOOG and AMZN results, and AAPL guidance, weakness balanced by MSFT and FB strength, and Europe momentum. US and EU data showed growth weakness but need for rate hikes. See latest presentation, video updates, and twitter @laidler_ben.
The surprising ‘reopener’ safer haven
Our ‘re-opener’ basket strongly outperformed with a combo of low expectations and reopening economies. Offset exposure to oil prices, and ‘work-from-home’ stock weakness.
Berkshire Hathaway leads the Value rebound
Warren Buffett’s Berkshire Hathaway (BRK.B), the largest US non-tech stock, been getting its performance and deal-making mojo back, with contrarian stance and $100bn+ cash.
Investor fear running ahead of greed
Investor sentiment at depressed contrarian ‘buy’ levels and a partial antidote to the three-pronged Fed, Ukraine, and China pressure on markets that are retesting the 2022 lows.
Uh-oh it’s May, and start of weak seasonality
Weak ‘sell in May and go away’ seasonality to be offset by ‘less bad’ fundamentals.
Crypto resilient to rampant USD. APE surges
Crypto stayed volatile with BTC and ETH around key price levels but sidestepping dramatic USD driven global currency market volatility. ApeCoin (APE) surges near top-20 only 2-mths after debut. Fidelity becomes first major US retirement plan provider to allow bitcoin allocations.
Commodity bans tighten supply more
Commodities firm despite surging USD, hitting gold, and China fear on copper. Trend of exporters restricting supply picked up as Russia cut gas to Poland and Indonesia expanded palm oil ban. This worsens tight commodity supply, and ‘high-for-longer’ price outlook.
The week ahead: Fed accelerates its hikes
1) Fed to hike interest rates 0.5%, whilst NFP data to show tight labour market. BoE and RBA to also hike.
2) Earnings from reopeners (MAR, BKNG) to health (PFE, MRNA) and tech (AMD, NXPI).
3) OPEC+ meet to keep supply tight.
4) Short week with labour day and Ramadan end.
Our key views: Watch for less bad news
Markets absorbed a lot of bad news, with biggest sell-off since 2020 covid crash. See fundamentals stressed but secure and sensitive to ‘less bad’ news, from Q1 earnings to ‘peak’ inflation, and China stimulus. Focus on ‘barbell’ of cheap cyclicals and ‘defensives’: Value, commodities, crypto, alongside healthcare, ‘big tech’, and high dividends. We are cautious on bonds.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -2.47% | -5.29% | -9.25% |
| SPX500 | -3.27% | -9.11% | -13.31% |
| NASDAQ | -3.93% | -13.51% | -21.16% |
| UK100 | 0.30% | 0.09% | 2.17% |
| GER30 | -0.31% | -2.41% | -11.25% |
| JPN225 | -2.56% | -3.50% | -6.75% |
| HKG50 | 2.18% | -4.31% | -9.87% |
*Data accurate as of 02/05/2022
Market Views
A week of high macro and earnings drama
- Another week of drama and fear to close out the worst month for markets since covid crash. With volatile tech-led equities and surging US dollar breaking key levels vs JPY, EUR, and GBP. GOOG and AMZN results, and AAPL guidance, weakness balanced by MSFT and FB strength, and Europe profit momentum. Latest US and EU data showed growth weakness but also need for rate hikes. See Page 6 for Resources guide of reports, presentations, videos, twitter.
The surprising safer haven
- Our ‘work-from-home’ (WFH) stock basket has slumped this year, double the S&P 500 fall, and given back all post-pandemic outperformance (see chart). Netflix (NFLX) been recent poster child for this reversal but it is far from alone. WFH is not out-of-the woods yet with earnings forecasts and valuations both still high.
- By contrast, our ‘re-opener’ basket has strongly outperformed helped by a combination of low expectations and reopening economies. This has offset the exposure to surging oil prices.
Berkshire leads the Value rebound
- Last Saturday Berkshire Hathaway (BRK.B), the largest US non-tech stock, hosted its ‘carnival of capitalism’ annual meeting live from Omaha for first time since 2019. It was Warren Buffett’s 62nd year as CEO, and was alongside partner Charlie Munger, and the next CEO Greg Abel. Berkshire has been getting both its performance and deal-making mojo back.
- Berkshire’s contrarian and Value style is being rewarded again, outperforming the S&P 500 near 30% so far this year, as the tech-led sell-off has accelerated. Lower equity markets and valuations play to Buffett’s be ‘greedy when others are fearful’ mantra and $100+ billion cash pile. Our allocation ‘barbell’ is similarly focused on cheap cyclicals and defensives.
Investor fear versus greed
- Markets have retested year-to-date lows. The dramatic Fed interest rate pivot has driven bond yields, a sharp valuation derating, rotation from Tech, and stoked recession fears. Ukraine war boosted uncertainty, commodity prices and Europe growth fear. China’ zero-covid lockdown completes the three-pronged vice on markets. Investor sentiment is at contrarian ‘buy’ levels.
- We are in a new and more difficult investment world, but see glass as ‘half-full’, and navigate valuation and growth risks with a ‘barbell’ of cheap cyclicals and traditional defensives.
Uh-oh it’s May, and start of worse seasonality
- As if investors need more reasons for caution, it’s May! One of most famous finance adages says, ‘sell in May, and go away’. There is some truth to this. May-October S&P 500 returns half that of rest of year, driven by weak and low volume summer months. This compares to year end and Q1 strength as investors reposition for ‘new year’ and companies lay out plans.
- We see poor seasonality more than offset by ‘less bad’ fundamentals and less policy fears, and hold off on capitulating on the markets.
Work-from-home stocks versus reopener stocks (since Pandemic)
Crypto resilient to rampant USD. APE surges
- Bitcoin (BTC) and ether (ETH) pressured by high equity volatility and under key $40,000 and $2,900 levels. But side-stepped a dramatic week of currency volatility with USD dollar index (DXY) hitting 20-year high, and JPY, EUR, and GBP all weakening through key price levels vs the USD.
- The ApeCoin (APE) ERC-20 governance and utility token soared to near a top-20 coin and the largest metaverse coin ahead of Otherside NFT sale. ApeCoin entered circulation March 16.
- Fidelity first major US retirement plan provider to allow allocations to bitcoin (BTC) in 401(k) accounts, in sign of rising mainstream adoption.
Commodity bans tightening supply
- Commodities firm despite the US dollar surge, that makes commodities more expensive for many, and with continued covid lockdown and growth concerns in China, the world’s no.1 importer. Gold fell with the strong USD. Whilst copper and iron ore hurt by China growth fear.
- The trend of commodity producers restricting exports, to secure domestic supply or raise additional revenue, is worsening the tight global supply/demand situation, and keeping prices high. Last week Russia halted natgas supplies to Poland and Bulgaria. No. 1 palm oil producer Indonesia expanded its export ban. This follows major exporters, from Russia to Argentina, boosting agricultural export taxes this year.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -1.80% | -15.19% | -21.72% |
| Healthcare | -2.88% | -7.08% | -10.54% |
| C Cyclicals | -7.36% | -15.95% | -21.46% |
| Small Caps | -3.95% | -12.61% | -16.98% |
| Value | -3.13% | -6.80% | -6.98% |
| Bitcoin | -3.07% | -19.60% | -19.19% |
| Ethereum | -5.83% | -18.53% | -25.30% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Fed accelerates its hikes
- US Fed to accelerate interest rate hikes, by 0.5% (Wed). Markets expecting aggressive rise to year end 3.0%. Non-farm payrolls (Fri) firm at 0.4m jobs, and unemployment a low 3.6%.
- Other central banks also hiking. Bank of England (Thu) set for +0.25% to 1.0%, and Reserve Bank of Australia to raise for 1st time.
- Hodgepodge of Q1 earnings with ‘reopeners’ MAR, BKNG, healthcare PFE, MRNA, NVO, consumer BUD, SBUX, EL, tech AMD, NXPI, SQ, SHOP. 80% of S&P 500 ‘beat’ forecasts so far.
- Meeting of OPEC+ (Thu) may keep cautious 0.4mbpd production rise. Start of seasonally weaker six months of year, reflected in ‘sell in May and go away ‘ adage. Labour Day and end of Ramadan holiday in much of the world.
Our key views: Watch for ‘less bad’ news
- Markets have absorbed a lot of bad news, with the biggest sell-off since the 2020 covid crash. We see fundamentals as stressed but secure and sensitive to any ‘less bad’ news, from Q1 earnings to ‘peak’ inflation, and China stimulus.
- Economies are reopening and growth is still robust. The aggressive Fed hiking cycle is increasingly well-priced and inflation trends near peak levels. Valuations are more attractive.
- Focus a ‘barbell’ of cheap cyclicals and select ‘defensives’: Value, commodities, crypto, with ‘big tech’ and healthcare. Cautious on bonds.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 0.35% | 4.52% | 30.57% |
| Brent Oil | 0.34% | 1.27% | 36.10% |
| Gold Spot | -1.84% | -1.64% | 3.63% |
| DXY USD | 1.97% | 4.64% | 7.55% |
| EUR/USD | -2.32% | -4.49% | -7.24% |
| US 10Yr Yld | -0.69% | 50.39% | 137.54% |
| VIX Vol. | 18.40% | 70.15% | 93.6% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: Navigating the valuation risks
High bond yields have a lot to answer for, driving stampede away from expensive stocks
High bond yields remain a clear and present danger for stocks, especially expensive ones. Simply put, stocks are worth the present value of their future cash flows. And investors use 10-year bond yields to discount those future cash flows back to today. The higher bond yields go, the less those cash flows are worth, and the lower valuations are. This explains the dramatic falls of Growth stocks, and outperformance of cheaper Value segments. ARK Innovation (ARKK) is -30% this year whilst the Dow Jones (DJIA) is down 8%.
This time has been different, with no offsetting growth rebound and with valuations high
There has been nowhere to hide in this Growth sell-off. Normally higher US bond yields, which have nearly doubled this year to 3%, reflect higher economic growth, and hence company profits. Strong earnings growth is usually an offset to lower valuations. This is not happening now, with global central banks playing catch up to already high inflation and economic growth cooling from the dramatic levels of last year. Plus, the valuation starting point was particularly high for many this time around, giving even more room to fall.
Our ‘fair value’ model still shows downside risks to valuations. This needs managing
We use 10-year bond yields, corporate profitability, and long-term GDP growth forecasts to estimate a ‘fair value’ S&P 500 (SPY) price/earnings valuation (see chart). Its 16x is roughly in line with the ten-year average for the S&P 500, but around 15% below current levels. We see gradually higher bond yields only part offset by still high corporate profitability and resilient GDP. A 0.5% higher bond yield cuts our P/E by around 10%, all else equal. This is not an exact science but tells us where the balance of valuation risks is – down.
But bond yields will not go to the moon, and have their own limits
Equities are being stress-tested by surging bond yields. But there is a limit to how high those yields will go, and the Fed has more ‘yield control’ now with its huge balance sheet runoff. US inflation-adjusted bond yields have nearly turned positive, debt levels are at record levels globally increasing the sensitivity to these higher yields, whilst the big yield gap with other global bond markets is a constraint.
Valuation risks keep us focused on cheap cyclicals, and growth risks on defensives
Our cheap cyclicals equity focus helps against the continued threat of lower valuations. Energy (XLE) and financials (XLF) are the cheapest sectors in the market. Whilst traditional defensives, like healthcare (XLV), and styles like high dividend (HDV), help against growth slowdown fears. These valuation concerns keep risk high for any on big valuations, especially if they see earnings disappointments – see Netflix (NFLX).
eToro ‘Fair Value’ S&P 500 P/E ratio versus current (x)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Geopolitical risks, the Fed hiking cycle, and China concerns have boosted uncertainty and weakened markets. We see this ultimately fading, the global growth outlook secure, and valuations now more compelling. This still supports a rare consecutive double-digit positive return outlook for the year despite the weak start. Focus on a ‘barbell’ of cyclical assets (Value equities, commodities, crypto) and select defensives (‘big tech’, healthcare). Cautious on fixed income. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing strong c4% GDP growth and with room for more earnings upside surprises. Valuations have now fallen back to average levels, and are well supported by still-low bond yields and high company profitability. Fed interest rate risks are now well-priced. See cyclicals and value catch-up, after a decade of underperformance, whilst big-tech is supported by its structural growth outlook. Now see overseas markets leading. |
| Europe & UK | Region is being buffeted by proximity and exposure to the Ukraine crisis. See secure outlook with 1) Europe’s strong macro ‘buffers’ of rising fiscal spending (defence and refugees), zero-bound interest rates (‘dovish’ ECB), and a weak Euro (50%+ company sales from overseas). Equity markets helped by 2) a greater weight of cyclical sectors, and lack of tech, 3) 25% cheaper valuations vs US, 4) decade of underperformance make under-owned by global investors. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China outlook improving as cuts interest rates (opposite of rest of world) reducing slowdown and property sector risks, focuses on stability ahead of 20th Party Congress, and with valuations now 45% cheaper than US and market heavily out of favour. Will support EM, but is exposed to Fed tightening. China recovery also helps global sectors from luxury to materials. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | More attractive as macro risks rise and bond yields better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. But also sensitive to bond yields. Healthcare most attractive, with cheaper valuations, more growth, some cost protection. |
| Cyclicals | We expect cyclicals – consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, to lead performance. Are most sensitive to re-opening economies, resilient GDP growth, and higher bond yield outlook, with more sensitive businesses, depressed earnings, cheaper valuations, and out-of-favour for years. |
| Financials | Financials will benefit from resilient GDP growth, with higher loan demand and lower defaults. Similarly, they benefit from higher bond yields, charging more for loans than they pay for deposits. Sector has cheapest P/E valuation of any, and regulators giving flexibility to pay large 8-10% dividend and buyback yields. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech themes. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | In ‘sweet spot’ of robust GDP growth, ‘green’ industry demand, years of supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply and Russia 10% world supply problems. Gold helped by risk-aversion but held back by rising bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.