EC The Stalemate

Over the past few months, the U.S. equity markets have gone nowhere fast. It has been a stalemate between bulls and bears.

 

On the bearish side of the ledger we have:

• Two consecutive quarters of double digit earnings declines.

 

• Negative sales growth over the past year.

 

• Longest string of economic data misses since 2008.

 

• Negative real GDP growth in the 1st quarter and likely flat GDP growth in the first half of the year.

 

This negative backdrop has been strongly countered thus far with the following arguments from the bulls:

• Every major central bank in the world (with the exception of Brazil) remains in easy monetary policy mode.

 

• There have now been 40 central bank easing measures announced in 2015 and more measures are expected in the coming months.

 

• The Fed remains extremely dovish after more than six years of 0% rates. Market participants are now pricing in only a 55% probability of a rate hike this year.

 

The Stalemate

And so we have a stalemate on our hands, with deteriorating fundamentals counteracted by unprecedented monetary easing. Most analysts believe the stalemate will be resolved to the upside, as it has been years since the market has done anything but go up. You’ve probably read about the coming “melt-up” in equities as market participants celebrate seven years of 0% interest rates.

Perhaps this melt-up will come at some point, but the equity market today seems more vulnerable to a resolution on the downside than it has been in quite some time. It is becoming increasingly difficult to push equities higher on multiple expansion alone, as U.S. stocks are already trading at their highest median price to earnings and price to sales in history. With earnings going in the wrong direction and quantitative easing on hold, the idea that stocks only go up is likely to be tested in the coming months.