Valens Market Phase Cycle Monitor & Corporate Credit Macro View for July 2017

August 4, 2017

Market Phase Cycle™ Investing Strategy

Cross Another Concern Off – Moderating Inflation Facilitates Premium Valuations

The most important factors that drive valuation multiples for individual companies surround a company’s earnings growth potential. As we have highlighted in recent editions of the Market Phase Cycle, earnings growth remains robust.

But there are two other key factors that impact market valuation: investor tax rates and inflation.

Investor tax rates in the US are highly unlikely to rise during the current administration, and this is supportive of valuations. However, inflation has been rising from 2015 lows through early 2017. Recently, these inflationary pressures have moderated, and low inflation rates help support premium valuations.

The combination of low inflation and tax rates and positively

trending earnings growth helps justify market upside.

Investor sentiment remains neutral, opening buying opportunities

Short-term and medium-term sentiment indicators, including investor equity allocation, correlation, and fund flows have all remained closer to historic averages since sentiment moderated in April. In a momentum market, this presents a buying opportunity.

Fundamental indicators point to earnings growth and fundamental growth trends that drive a momentum market

Strong management execution is driving forecasts for earnings growth in 2017 and beyond. Growing management confidence about investing in growth is also translating into actual signals of increased investment. The market is pricing in a rebound in ROA’ and Asset’ growth, meaning the market is fully valued, but if companies can deliver on earnings growth, it could be a catalyst for further equity upside.

Credit risk is moderating after having shown reasons for concern

In recent quarters, negative trends in the senior loan survey, debt maturity headwalls for smaller-cap companies, and write-off trends had flagged reasons for concern heading into 2018. However, all these factors have seen improvements in the past two quarters, reducing the risk of a credit-driven equity sell-off.

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