In a note to clients sent out at the end of last week, the duo writes that they expect the US dollar to strengthen further this year and 10-year Treasury yields to stay well under 2% for the foreseeable future as macro headwinds push investors to seek out safe haven assets. This trend will also limit any advance in oil prices and pressure on net interest margins at Financials.
“Fed left rates unchanged, but acknowledged a sturdy domestic economy and improving job mkt. But weaker than expected 2Q GDP pushed the recently resurrected 50% chance Dec hike to 1/3, and 10yr Tsy yields under 1.5%. We’re uncertain when the Fed hikes, but a hike likely boosts the dollar, contains wage inflation risk and flattens the curve. This was our preferred path. But even without a hike we think inflation risks are not enough near-term to significantly boost Tsy yields this year given an increasingly nil rate world. We think the dollar gains even without Fed hikes because of BOJ, ECB and perhaps BOE actions. A stronger dollar is inevitable in a slow growth world, we’d prefer it comes via US hikes than foreign cuts as low rates strain financial intuitions. Alas, this doesn’t seem to be the policy path. These low yields support higher PEs, but where yields will be longer-term is still very uncertain as yields haven’t yet been tested by a series of Fed hikes.”
Shelter from the upcoming storm in Health Care, Tech and Utilities
It seems the caution is the name of the game for David Bianco and Ju Wang and in this environment, they’re favouring stocks with a value slant. Specifically, stocks in the Consumer Discretionary sector trading at reasonable P/Es should benefit from consumer spending growth while the Health Care and Tech sectors are favoured thanks to their strong second-quarter earnings performance and robust year-on-year sales growth. Telecom and Utility sectors are also liked for similar reasons.
At the time of the report’s publication, 76% of the S&P 500 had reported earnings with 63% of companies beating on earnings per share with a weighted average beat of 2.4%. 34% of companies beat on sales with an eight weighted average beat of 0.9%.
Based on the figures, so far the blended earnings per share growth for the S&P 500 year-on-year is -2.2% or 2.2% excluding Energy and 3.3% excluding Energy and Financials.
Blended year-on-year sales growth is 0.2% for the index overall, 2.9% excluding Energy and 3.4% excluding Energy and Financials.
Telecom, Health Care, and Consumer Discretionary have put in by far the best performance reporting year-on-year sales growth of 9.8%, 9.4% and 6.7% respectively.
Blended Q2 EPS year-on-year growth is strongest in the Consumer Discretionary (11.3%) and Health Care (6.1%) sectors all other sectors have reported low single digit EPS growth or EPS decline.