There’s a lot to worry about these days for investors. Is the trade war going to get worse and send the economy into recession? Are stocks overvalued and pricing-in too much optimism that everything will work out?
Morgan Stanley equity strategist Mike Wilson and his team, the most prominent and early bears of 2018 who predicted the big correction, were out this week once again lowering their earnings estimates for this year and next.
They now predict S&P 500 companies will earn only $162 a share in 2020, unchanged from 2019's weak advance as escalating tariff battles weigh on the global economy. That makes the stock market trade at 18 times estimates. Pretty rich for no growth.
As Bloomberg surmised, "If the new call bears out, corporate America will notch two consecutive years of zero profit growth, the weakest stretch since the 2015-2016 oil-induced recession."
But Wilson and his team’s expectation that an earnings recession would keep the stock market from making new highs this year was clearly wrong. So what else is going on that has investors and corporations continuing to invest in growth as if this economy is invincible?
When you step back from the noise of the trade war -- and look at data instead of headlines -- three bullish trends stand out. They are each a product of different time frames and thus will have unique investing impacts.
In this article, I’ll describe each trend and its data set, in order from the shortest impact to the longest.
Bullish Trend #1: Industrial Cycle Lows
This trend goes “under the hood” of the market internals to actually point out a reversal of sorts. For the past year, defensive sectors of the market like staples (+15%), utilities (+22%), and real estate (+16%) have strongly outperformed while industrials, energy and financials are all in the red.
As an investor and trader, I love when we get these big sector rotations that go too far -- to say nothing of the world piling into Treasuries. To me, it's all money that is set to surge back in the other direction as waves of allocation and sentiment shift.
And this week, two of the world’s most important investment banks were out with research suggesting we are near a turn of fortune in this "rotation to safety." Both Goldman Sachs and Bank of America strategy teams put out separate notes about how "cyclicals are oversold" and due to swing back just like in 2012 and 2015-16.
Since capital flows so easily across borders, even the trade war can't stop investment dollars from moving where there is growth and opportunity. As I like to say, China and India alone represent 2 billion people yearning for the middle-class lifestyles of the West. Money won't stay in cash very long when these demand markets exist.
Continued . . .
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Bullish Trend #2: The Softosphere Explodes
This trend is all about the technology sub-sector that is eating the world -– and the market -– alive. I’m talking, of course, about software and its explosion of companies, applications, and disruptive reach that is making everyone more productive. And this trend is nowhere near done exploding.
Technology research firm IDC estimates that the worldwide big data and analytics software market will surpass $50 billion by 2021. Statista estimates that total revenues from a wider view of the big data/business analytics market will hit over $250 billion by 2022.
How is this massive market possible? Here's how I've been explaining it to my followers this year...
Since software is the brains of computing and specialized problem-solving/data manipulation, there are nearly infinite brains which can be created to run our world and all its parts. Different platforms speak to and serve different types of industries and customers.
And data is the new gold rush for companies to compete in -- or get permanently disrupted. As I recently told investors about one company I love in particular, "There's a gold rush going on and it's inside of each company's own data. They must learn to mine it and harness it, or get their lunch eaten by the younger companies that grew up with data analytics as second nature."
Software code has always broken the bounds of time and space by being invisible, easily transferable, and ideal for automation. And now with cloud computing advances and hyper-speed broadband/wireless networks, software applications are more mobile and real-time than ever before.
Think about that. Meaningful hardware inventions and innovations will come and go -- from computers and cars to furniture and fashion -- but the software possibilities are endless, just like songs, stories, and scientific experiments. And engineers are just opening the Pandora's box of what is possible with machine learning and artificial intelligence.
In short, software is making companies and individuals more and more productive, at lower and lower costs. And that is what keeps driving what I call the Technology Super Cycle and making software sub-sectors the strongest leaders of the market this year.
The great news here is that there are so many companies and ideas to choose from in this megatrend. In fact, I have a watch list of 50 that I am actively tracking to invest in and trade.
Bullish Trend #3: We’re Getting Younger!
My final trend even surprised me when I saw the data. This month, the Census Bureau released the population-by-age estimates for 2018. Bill McBride over at the Calculated Risk blog updated a table where he tracks the data showing the top 5-year cohorts (ranked by size) for 2010, 2018 (the new estimates), and Census Bureau projections for 2020 and 2030.
“By the year 2020, 8 of the top 10 cohorts will be under 40 (the Boomers will be fading away)” he writes. And by 2030, 10 of the 11 biggest cohorts will be under 50.
Without reproducing his table here, I’ll just describe that the biggest cohort for 2020 is the age group 25 to 29, while the sixth biggest is the age group 20 to 24. Cohort four is the “under 5” set and #7 is ages 5 to 9.
Together, cohorts 1, 4, 6, 7, 9 and 10 are all under 30 years old. Pardon all the numbers, but this data is extremely important for a long-term economic tide that is about to rise again.
McBride, who has long focused on demographics as keys for housing, and thus the economy, summed up the data this way...
There will be plenty of "gray hairs" walking around in 2020 and 2030, but the key for the economy is the population in the prime working age group is now increasing.
Bottom line: You can expect family formation and housing -- key engines of economic growth -- to be firing on all cylinders in the 2020s.
Stock-Picker and Trader Paradise
What all this data says to me is that there will still be hundreds of stocks making new highs this year, even if the broad market chops around. And this will be true regardless of what the Fed does with interest rates or what the White House does with the trade war.
So ignore the noise and look for growth in stocks and industries, not in the market as a whole. Start building your watch lists of names with strong momentum in earnings and price -- or price that has recently been tossed out with the bath water.
And ahead of Q2 earnings season, be especially watchful for solid companies in great industries, and with a rising Zacks Rank, as those will be the ones that outperform in the summer earnings parade.
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Kevin Cook, Senior Stock Strategist at Zacks, is a leading expert in technical analysis and what makes markets move. He provides commentary and recommendations for the Zacks TAZR portfolio.
¹ The results for the trades listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors.