“…frankly, in our view the market is simply not discounting future earnings to nearly their proper degree, in even a mild recession scenario.”

“…recall that we’ve been stressing that the next bear market leg to drop will be about corporate earnings…”

“Analysts have cut their S&P 500 earnings estimates for the third and fourth quarters, and for all of 2022.

For the third quarter, analysts expect overall S&P 500 earnings to have increased just 4.6% over the year-ago period, compared with growth of 11.1% expected at the start of July, while they see earnings for all of 2022 growing by 7.7% versus 9.5% seen on July 1, according to IBES data from Refinitiv as of Friday.”

Consequently, on a forward earnings basis, valuations are beginning to look, well… interesting:

“The S&P 500’s forward 12-month price-to-earnings ratio is now at 16.3, down from 22 at the end of December and near its long-term average of about 16, according to Refinitiv data.”

Now, here’s the ironic kicker… With amazing consistency stocks tend to perform rather nicely during earnings seasons when net earnings revisions come in negative, and vice versa (stocks tend to decline when earnings revisions are positive heading into the season)… I.e., Wall Street tends to overdo their estimates in the prevailing direction, and, therefore, when they’re bearish on earnings going in, companies tend to surprise to the upside… That’ll be the setup (with regard to earnings) come October.

But, as with short-term bullish technical patterns, even your most consistent setups are prone to failure, during a bear market.

As I suspect you’ve noticed, while we’re not nearly ready to let the pigeons loose just yet, I’ve been anticipating a potentially notable bear market rally anytime now… with yesterday, frankly, having all the makings.

And sure enough, the day began with an impressive up move — with decent volume and breadth — it definitely looked near-term sustainable to me early in the session. 

Then the following (as described yesterday evening by Bespoke Investment Group) — which was more than the market could bear, at this juncture:

“First, a potential accident on the Nordstream pipeline between Russia and Germany was widely accused of being sabotage by an unknown actor as more information was released.

Second, Bank of England Chief Economist Huw Pill gave a speech as the US market opened arguing that recent fiscal plans from the Truss government “requires significant policy response”; UK OIS markets now price an astounding 157 bps of tightening at the November 3rd meeting and another 183 bps of tightening over the December and February meetings taking Bank Rate over 6% by the March meeting. 

The result was a collapse into the London close for all things British: sterling reversed from up over 1% to red by noon ET while UK rates bear-steepened in dramatic fashion that included trades above 5% on the 30y gilt yield for the first time since 2002.

Not helping matters was a barrage of Fedspeak that included a comment from St. Louis Fed President Bullard that the “credibility of our inflation-targeting regime is at risk” amidst “a serious inflation problem.” Has he looked at inflation pricing lately?

That followed comments early this morning that describe 4.5% unemployment as forecasted by the FOMC’s Summary of Economic Projections as “a very good outcome” if it’s realized. Really?

Finally, later in the afternoon, Minneapolis Fed President Kashkari emphasized that the Fed is “not seeing” progress on inflation yet, and expressed a need to “keep tightening until core inflation declines.” What kind of backwards looking data is he looking at?

The only Fedspeak that sounded remotely reasonable to us came from Chicago Fed President Evans, who said on CNBC Europe this AM that he was worried they were going too far too fast. Finally, something that doesn’t sound ridiculous.”

As you’ll see in this morning’s video update, short-term technical patterns — and sentiment (uber-bearish) — remain conducive to a bounce in equities, but let’s not hold our breaths right here…

Stay tuned…