Going by early returns, this earnings season is shaping up as a historical one relative to forecasts. Its impact on the market has been less memorable.
Among S&P 500 companies that have disclosed results, 86% beat analyst estimates, on pace for the best showing since Bloomberg began tracking the data in 1993. That’s doing little to excite the bulls: shares of reporting companies are actually down about 2% the next day. The result was a relatively flat week in which the S&P 500 stalled about 75 points away from a record.
While a lot of things could explain the limp outcome, one possibility stands out: there aren’t many people left to buy. So enthusiastically have fund managers piled into equities as they rallied this year that measures of bullish exposure are bordering on unprecedented heights.
“Part of it is the uncertainty and part of it is just expectations are already priced in,” said Gene Goldman, chief investment officer at Cetera Financial Group. “The only thing that would push earnings even higher is a V-shaped recovery. We do believe we’re in a U-shaped economy where this virus overhang, the uncertainty in Washington, lack of stimulus is going to keep the economy slower for a while.”
Stocks endured a bumpy ride but managed to post their third straight weekly gain, with the S&P 500 climbing 0.2%. It got within 1.3% of its Sept. 2 record after a big Monday rally, but ended the week off it by 2.7%. The tech-heavy Nasdaq 100 Index added 1.1% while the Dow Jones Industrial Average was little changed and the Russell 2000 Index slipped.
The biggest banks largely delivered profits that beat analyst estimates, but most of them saw sharp drops in their shares over the five days as fears persisted that the worst may not be over for loan defaults. Wells Fargo & Co. sank almost 10%, while Bank of America Co. and Citigroup Inc. slid at least 3.8%. Goldman Sachs Group Inc. dropped 0.6%, while JPMorgan Chase & Co. eked out a gain.
In a market where valuations have expanded to levels not seen since the dot-com era, the bar for earnings beats pushing stocks higher may be too high for companies to clear. Investors have also grappled with marketwide issues from the looming presidential election to the prospects for a government spending package and rising virus cases.
“I don’t think the market is going to reward a lot of these names unless it’s a substantial beat just given where valuations currently stand,” said Jeff Schulze, investment strategist at ClearBridge Investments. “Over the past couple of weeks it’s been choppy. Until we can get through election day, I think we’re going to be in a bit of a trading range for the markets.”
Another hurdle is that demand for equities may be fading. As stocks quickly bounced back from the September rout, money managers went on a shopping spree, according to a survey by the National Association of Active Investment Managers. NAAIM’s exposure index, tracking advisers from 200 firms, fell to a four-month low of 53% in early September and has almost doubled to 103%, the second-highest level in two years.
Money managers in Bank of America’s latest survey demonstrated a similar urge to put money to work. This month, professional investors reduced their cash holdings to 4.4% of their portfolios, the lowest level since stocks fell into a bear market in March. A net 27% of respondents were overweight stocks, up from 18% in September. Investors were particularly bullish on U.S. equities, with exposure standing one standard deviation above the historic average.
Among the most bullish are hedge funds that make both long and short bets on equities. Net leverage, a measure of industry risk appetite that takes into account bullish versus bearish positions, has risen to the highest level in at least 12 months, according to data compiled at Goldman’s prime brokerage unit. At Morgan Stanley, clients have also ramped up their leverage, with positioning at the start of October ranking in the 79th percentile of a 10-year range.
With fund positioning stretched, it’s hard to envision a boost in equity bets considering how messy the pandemic and the election can turn in coming weeks, according to Randy Frederick, vice president of trading and derivatives at Charles Schwab & Co.
“It’s not that there’s not money out there to be bought into but that there’s not necessarily a willingness on the part of those who are holding that money to go into the market,” said Frederick. “People are very uncomfortable and uncertain about what might happen.”