zerohedge.com / by Tyler Durden / Jul 4, 2017 10:57 AM
In his latest note, Citi’s Jeremy Hale shows something troubling to all those, such as Bloomberg, who point to yesterday’s ISM manufacturing sentiment indicator (while ignoring the rapidly slowing PMI) as indication of more upside left in the economy: according to the Citi cross-asset strategist the bank’s NISI Index (news implied sentiment indicator, Figure 1), has plunged sharply into bearish territory in the latest print, to its lowest level in 18 months, since January 2016. According to Hale, as Trump “Optimism” fades, there may have been too much “spirit” priced into the SPX. The latest print in NISI suggests renewed skew towards pessimistic sentiment and thus looking at past correlations to the NISI, Citi warns that the SPX may fall relative to trend for a period on this measure.
It’s not just the market’s fading euphoria that worries Citi: according to Hale there are 4 other things that worry the bank when it comes to equities, with valuations at the top.
Arguably already rich and perhaps increasingly reliant on earnings to do the “heavy lifting” from here. Breaking down the P/E ratio to P vs. E illustrates how much the market has re-rerated significantly in the last couple of years (Figure 2). Even value stocks are expensive in the US. Additionally, estimates for the current ex-ante ERP are starkly below average historic excess equity returns of +4.7%. In order to even achieve this mean level of excess return, we’d need to see a nominal gdp growth rate of >5.25% (which would be above trend on a 5y, 10y and 30y basis). As such, this would require significant upwards revisions to Citi’s current growth outlook, at a time where Citi Economists say they are close to the cyclical peak in global growth and see increasing downside risks to their forecasts. Combined with undershooting inflation/ declining inflation expectations, this seems even more unrealistic and makes equities appear richer on this basis.
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