William Dudley the former NY Fed President had a good Bloomberg Opinion piece out today Don’t Let the U.S. Economy Hit Stall Speed arguing strongly in favour of Robert Shiller’s latest book “Narrative Economics” which is an argument for how strong narratives in the economy becomes a feedback loop that is both difficult for the Fed to observe before it’s too late and often binary. The question is where we are on the negative narrative. Our view is that Q4 could become the tipping point if layoffs accelerate due to “kitchen sink” effects from nervous management at large companies not willing any longer to keep excess capacity in anticipation of a rebound in economic growth. But one thing where Dudley comes out naïve is on the US consumer and the low recession risk. The latter has a high 30-50% probability within the next 6-12 months and the US consumer changes also binary with the narrative.
Talking about narratives this week also has a potential US-China press conference on the scopes for a trade deal, so this should be on the radar the entire week. The US-China trade war has been one of the key engines behind the slowing economy and any change in tone could help sentiment.
On the earnings front the biggest events this week are technology earnings from Alphabet (Google’s parent company), Facebook and Apple. These three companies have a combined S&P 500 Index weight of 9% so obviously important for whether the S&P 500 continues higher into unknown territory. Analysts expect another quarter of negative earnings growth for Apple while Alphabet’s earnings growth is expected to have declined to only 5% y/y. Only Facebook has still a very upbeat expectation with EPS growth expected at 28% y/y as the social media giant continues to take market share in online advertising and monetizing its Instagram business. Last Friday we also highlighted the other important earnings to watch this week with major health care stocks taking center stage.
For all the talks about all-time highs in equities and better than expected earnings releases the changes in 12-month EPS expectations for S&P 500, STOXX 600 and MSCI China are still uninspiring for 2019 indicating that the entire rally this year is based mostly on multiple expansion and TINA effects.