Head of Equity Strategy
Summary: Equities are getting frothy with short squeeze and momentum accelerating technology stocks higher. This has led to the highest top five concentration in the S&P 500 eclipsing the dot-com bubble in a sign of destabilisation and increased fragility. We are putting out an early warning to investors as a sharp correction in equities could be imminent. Our overall longer term view is still positive on equities, but sharp moves up are typically followed by rapid declines. In today's equity update we also talk about equity valuations and earnings season.
The first two weeks of the year have seen a tremendous acceleration in technology stocks with the sector by far outperforming all other sectors. As we talk about in today’s Market Call podcast we are witnessing an epic short squeeze in Tesla and other heavily shorted stocks. In higher echelons of the market the FANG+ Index is accelerating at an unprecedented pace showing clear signs of frothy behavior. It mimics the move leading up to the volatility explosion in February 2018. While we laid out our asset allocation view yesterday as overweight Europe and EM equities, and overweight equities vs bonds, the short-term dynamic could get ugly here when the short squeeze and momentum have exhausted itself.
In VIX we are observing a increase in net positioning although from a very low level but could signs that bigger players in the futures and option markets are preparing for increase in volatility. On the other the forward curve in VIX futures is still not sending any distress signals, but these things change fast and the catalyst may be very subtle.
The rapid rise of the large US technology stocks has catapulted the five largest stocks on market value to reach an index weight of 18%, the highest level observed in the S&P 500 in 25 years. Increased concentration risk is a clear sign of fragility increasing and the system is destabilizing underneath the surface. It’s historically a recipe for violent moves so it should definitely be on investors’ radar.
As we hinted at in our equity update yesterday the equity valuation expansion might be fueled by investors anchoring their long-term interest rate expectations at a continuing lower level increasing the equity risk premium and hence allowing higher multiples on earnings. With the lower anchoring and dual stimulus coming from the monetary and fiscal side we cannot rule out that equity valuation will reach new all-time highs before the party ends. But the current move seems to aggressive that the probability of a sudden large drop in equities could happen anytime. Investors should consider reducing equity exposure somewhat here or add some downside protection.
The earnings season kicks into gear today with the first big names (Citigroup, JPMorgan Chase and Wells Fargo) reporting Q4 earnings. Consensus is looking for strong EPS y/y figures for JPMorgan Chase and Citigroup due to base effects from a very weak Q4 2018. Wells Fargo which is a more pure banking play is expected to show slightly negative y/y EPS growth. All there financials are expected to show negative q/q growth numbers. But overall analysts are looking for decent numbers from financials compared to other industries. In aggregate S&P 500 is expected to deliver its fourth straight negative y/y EPS growth in Q4 for the first time since the financial crisis. However, the real price action lies in the outlooks which should be improving given the recent macro backdrop and better signs coming out of Asia.
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Steen Jakobsen,
Chief Investment Officer
A political switch in China towards less tough control of its people and companies may kick things back into gear.
Redmond Wong,
Market Strategist
While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.
Chris Dembik,
Head of Macroeconomic Research
As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.
Peter Garnry,
Head of Equity Strategy
New alliances and collaborations outside of China may lead to prosperous times in Asia.
Charu Chanana,
Market Strategist
For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.
Peter Siks,
Investment Coach
Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.
Ole S. Hansen,
Head of Commodity Strategy
2023 could be a tough year for currencies but EUR and JPY may have some upside.
John J. Hardy,
Head of FX Strategy
The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.
Jessica Amir,
Market Strategist
From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.
Mads Eberhardt,
Cryptocurrency Analyst
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
