If trade optimism is truly feeding these stock records, then get the confetti ready.
Reports that the U.S. maydrop some China tariffsto seal a “phase one” deal are boosting stock futures on Tuesday. That’s a day after all three major U.S. indexes nailed record closes.
But Lori Calvasina, RBC Capital Markets ’head of U.S. equity strategy, is wary of those highs and offers five reasons why investors should be too, in ourcall of the day.
In a note to clients, she says she’s sticking to RBC’s year-end S&P 500 SPX, 0. (%) *********** target of 2, 950, even as the index pushes above 3 , 00 0. Here’s why:
1) “Euphoric” U.S. equity futures positioning among asset managers is nearing July 2019, September 2018 and January 2019 peaks that are in line with highs seen just before the global financial crisis. That means stocks could be vulnerable to bad news.
2) Valuations in the US equity market are back to late – 2017 highs, and Calvasina says improvement from here may be tough given the Federal Reserve is expected to pause on further interest rate cuts.
3) Earnings forecasts for 2020 are too high.
4) Stocks are already accounting for the benefits of a phase one trade deal, which Calvasina doubts would undo damage that’s been done to business confidence.
5) As of Nov. 4, the S&P (has rallied more than 30% from the December 2018 low. That’s similar to rallies seen off index lows in 2010, 2011 and 2016, and as her chart shows, each of those years had market pauses along the way:
“The new thought we offer this week is that we haven’t learned anything in the current reporting season that justifies euphoric positioning and peak valuations. Reporting season has been better than feared, but the overall tone around demand / macro, tariffs and cost savings all sounds very familiar – it’s what companies have been saying all year, ”says Calvasina.
Our chart comes from the World Gold Council. On Tuesday, the industry bodyreportedthe biggest exchange-traded fund inflows for gold in three years, due to accommodative monetary policies, safe-haven demand and investors chasing some big gains.
It’s been a strong year for gold (GC) ,– 1. 06%, which is up 17% so far this year, putting it on a par with the Dow industrials.
Pharmaceutical group Mylan MYL, 1. 52% topped estimatesand Allergan (AGN, 0. 13%, also deliveredupbeat earnings news. Meanwhile, exercise equipment maker Peloton’s PTON,– 9. 35% revenue beat offset awider-than-expected loss.
Uber UBER,– 7. 18% shares are stumbling after the ride-hailing servicereported another mega loss.Shares of fast-food restaurant Shake Shack SHAK,– 17. 34% are also sliding as same-store sales and its outlookmissed forecasts.
The U.S. trade deficit narrowed in September. The Markit services purchasing managers ’index, the ISM non-manufacturing index and job openings are still ahead. There are also a lot of Fed speakers this week.
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