Valens Market Phase Cycle Monitor – May 2024 – The Market Follows Earnings Growth

May 16, 2024

  • The Market Follows Earnings Growth. Analysts expect AI and a broader market recovery to fuel a slight recovery in growth this year, contrary to management’s actions and indications. After seeing profits shrink 9% in 2023, investors are betting corporations can resume margin expansion and growth to fuel an earnings recovery. In recent months, management’s growing willingness to invest based on sentiment analysis may fuel that growth as credit overhangs are removed.
  • The potential debt default risk has been significantly reduced. Credit availability is still lacking, and corporations and individual consumers are starting to show pressure from credit tightening, but they are not stretched to the point of threatening a wave of defaults. Without significant refinancing risk, the current tight credit environment is likely to be a tax on growth as opposed to a potential catalyst for a recession.
  • After the recent strong rally, valuations reflect a bet on growth resuming, and the market is now at extended sentiment levels, increasing the risk of volatility.
  • Monthly inflections:
    • Credit (55% of macro outlook): Negative (no change)
    • Earnings Growth (30%): Neutral (no change)
    • Momentum/Sentiment (10%): Negative (downgrade)
    • Valuations (5%): Negative (no change)
  • Timetable Recommendation: 40% Equity/60 Bond Split for 5-10 Year Money and 18 Month Dollar Cost Averaging.

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