An investor who gained legendary status after nailing the 2008 housing market collapse says he sold some of his equity holdings even though Q1 earnings have been remarkably strong.
The News
In a new episode of The Real Eisman Playbook, Eisman says Q1 earnings results have come in and shattered the consensus forecast in a big way.
According to Eisman, the fundamental data indicates that a recession is just not in the cards despite rising oil prices and geopolitical concerns.
“On January 1 and April 1 of this year, the expected revenue growth for the S&P 500 for the first quarter was 7.3% and 9%, respectively. As of now, the actual revenue growth was 11.1%, so much better. On January 1 and April 1, expected earnings growth for the S&P 500 for Q1 was 14.4% and also 14.4%. As of now, the actual earnings growth came in at an amazing 28.3%. With growth like this, a recession is just not on the horizon for now.”
While the data shows that the US corporate earnings story is fueling equity rallies, Eisman says he decided to take some chips off the table because he’s seeing the yellow flags in the bond market.
“What’s changed is interest rates. For the last several years, the 10-year Treasury yield has been in a range of 3.9% to 4.5%, and I have felt for quite some time that as long as yields remain in that range, the market is fine. However, partially because of the war, inflation is rearing its ugly head. The recent CPI and PPI data have been much higher than expected. As a result, yields have been climbing. The 10-year yield is now 4.6%. For me, 4.5% is the Rubicon, and that is why I lightened up.
It also looks like the approaching inflation data reports are not going to be benign, so rates could march even higher. This keeps pressure on stocks, and lightening up makes sense.”
What It Means for Investors
Eisman joins the chorus of economists and analysts sounding the alarm over rising bond market yields. Earlier this week, Morgan Stanley CIO Mike Wilson warned of a “meaningful” market pullback after the 30-year Treasury rate soared above 5% and the 10-year climbed to 4.58%. For Eisman, the sell trigger was the 10-year moving above 4.5%.
Savvy investors have historically unloaded or lightened their equity holdings whenever rates on long-dated bonds rise, expecting that other investors will likely rotate capital into Treasuries that offer solid yields with less volatility and uncertainty. Rising bond rates also signal that investors are demanding higher yields because of risks such as geopolitical tensions and sticky inflation.
On top of rising Treasury yields, the S&P 500 has pulled off one of the most remarkable recoveries in recent history, surging more than 18% from its March 30th lows. Evercore ISI managing director Julian Emanuel recently warned that the firm’s data showed very few people are hedged as the S&P 500 hovers at all-time highs.
Taken together, it appears that conditions for a significant market pullback are building, and having a cautious bullish stance might pay dividends. Traders believe in the idea of letting winners run, but they also take some profits at certain levels to lock in gains with the expectation of buying back at lower prices.
Eisman appears to be employing the same tactic when he lightened his holdings, putting him in a position to accumulate names in case of a correction.
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