DEEP DIVE: Revisiting Venus and Mars

Strategy I: Investors Are Still from Mars.

Our May 18 Morning Briefing was titled “Analysts Are from Venus; Investors Are from Mars.” We wrote:

“Stock market investors seem to believe that industry analysts are becoming increasingly delusional. The latter have been raising their revenues and earnings estimates since the start of the year, while the former have been cutting the valuation multiples they are willing to pay for those estimates. And both actions have been in response to the same development, raging inflation.

"The analysts seem to be raising their projections partly to reflect rapidly rising prices, while the investors have been worrying that higher inflation will force the Fed to tighten until a recession occurs. A recession would force analysts to scramble to cut their estimates. In this scenario, investors would continue to slash valuation multiples—and they would have ‘we told you so’ bragging rights.”

As we updated in the previous section, investors have been pounding valuation multiples downward since the start of this year. They’ve been doing so as inflation has turned out to be less transitory and more persistent than was widely expected last year. This year, especially after May’s CPI shocker was released on June 10, investors have concluded that inflation may be much more protracted than previously thought and that the Fed tightening cycle will last for a while. They are all chanting the same mantra now: “Don’t fight the Fed when the Fed is fighting inflation.” As a result, this year’s correction in the S&P 500 morphed into a bear market on June 13.