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Valens Market Phase Cycle Monitor & Corporate Credit Macro View for July 2018

Market Phase Cycle™ Investing Strategy

A Goldilocks environment as earnings season enters full swing?


The term goldilocks often gets overused in financial markets. There just are not many other adjectives that explain an environment where things are positive, but not so positive that the market gets overheated, the “not too hot, nor too cold” phenomenon, quite as succinctly.

That being said, when looking across fundamental, valuation, sentiment, and equity indicators as we enter the heart of the Q2 earnings season, goldilocks certainly feels like an appropriate adjective to use.

After significant volatility in investor sentiment the past five months, from overly negative in February and parts of March and April to overly positive in early June, most investor sentiment indicators are currently at neutral levels, neither “too hot, nor too cold.” This reduces risk for positive or negative market surprises.

As we enter Q2 earnings season, forecasts for ROA’ remain for a steady improvement, with UAFRS-adjusted EPS projected to rise by 14% in 2018 and 13% in 2019, pointing to robust fundamental growth. This provides strong underlying support for a healthy market.

While growth is forecasted to be favorable, markets are not pricing this in. At current valuations, markets are pricing in earnings to grow a much more modest 4% relative to 2017 levels over the next several years, with a V/E’ of 19x.

Strong corporate fundamentals and limited credit risk are keeping this market from cooling off too much. At the same time, modest valuations keep the market from overheating, as do neutral sentiment indicators. The market certainly does feel “just right” for appreciation as we head into the back half of 2018.