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In March, I wrote about “The Tale of Two Markets,” where I shared a story about the sudden divergence of investor confidence.
On the one end, risk-seeking investors were doubling down on speculative stocks. The Nasdaq-100 Index of tech stocks was already up 10% for the year, and investors saw it as a sign to pile in.
Meanwhile, more conservative investors were doing the opposite. At InvestorPlace.com, our free market news and analysis site, we saw unusual interest among our readers that month in stocks to sell, particularly within the larger companies.
Companies like Tesla (NASDAQ:TSLA) have since sunk double digits as fears of a profit crunch came true. In its Q1 earnings call, the firm revealed its price cuts had failed to stimulate enough demand to fill its factories.
Today, we’re seeing a new pivot, where everyone is beginning to worry about the economy. ETF flows are turning negative, and we’re seeing even greater interest in InvestorPlace.com stories listing stocks to sell short.
It’s now a “tale of one market.”
Yet, signs are emerging that markets are bottoming out. And now could become the ideal time to start buying the dip on your favorite cyclical companies.
1. Earnings Are Declining…
According to FactSet, first-quarter earnings season has seen a 6.5% earnings decline so far among S&P 500 companies. If this trend continues, it will mark the largest year-over-year earnings drop since 2020, when earnings collapsed 31.6%.
These concerns have resonated with InvestorPlace.com readers. This week, Larry Ramer’s article “7 Stocks to Sell in April Before They Crash and Burn” became one of the most read on our site.
Here, Ramer names companies like Clorox (NYSE:CLX), a firm that already experienced a -33% earnings per share decline last year. Analysts expect another 4% drop in 2023, making its 37X forward price-to-earnings ratio seem absurd. The firm typically trades for roughly 60% of that value.
2. … And Speculators Are Worried About Crypto
Even crypto investors are beginning to seek the exits. Bitcoin (BTC-USD) prices have dropped from $30,000 last week to $28,700, and smaller coins have retreated further.
It’s no surprise that investors were so interested in Muslim Farooque’s timely piece “The 7 Most Dangerous Cryptos to Avoid at All Costs.”
In it, he looks at some of the most overhyped assets that will likely lose investors billions as the crypto bubble deflates. In particular, he warns about tokens like Shiba Inu (SHIB-USD) and Terra Classic () that offer little real-world utility and little upside for an upcoming bull run.
I highly recommend a quick scan even if you’re not a crypto investor.
3. But More Companies Are Beating on Earnings…
The extreme investor bearishness, however, cuts both ways. According to the same data from FactSet, around 90% of reporting companies have now beat on earnings, compared to a 77% historic average.
Put another way, Street estimates are so bearish that EPS misses are happening 57% less often.
InvestorPlace writers Eddie Pan and William White also been following major beats. Pan writes about Charles Schwab (NYSE:SCHW), and White writes on firms like AKA Brands Holding Corp. (NYSE:AKA) and Western Alliance Bancorporation (NYSE:WAL).
As Q1 earnings season continues to unfold, be sure to check back regularly for insights.
4. … With Consumer Discretionary Leading the Way
These EPS beats are turning into an investment bonanza for investors who are still deploying capital.
Consumer discretionary has been doing particularly well. On average, the sector has beat by 51.1%, with firms like Nike (NYSE:NKE) generating EPS of 79 cents (vs. 56 cents expected) and homebuilder Lennar (NYSE:LEN) reporting $2.06 EPS (vs. $1.55 expected).
Financials (+14.8%) and Industrials (+9.6%) are also showing strength. These are cyclical stocks that tend to bottom out early in an economic cycle and rise before everyone else.
Even InvestorPlace.com writer David Moadel has turned bullish on retailer GameStop (NYSE:GME), a company patently exposed to discretionary spending. To see his reasons for that intriguing call, click here.
5. The Powerful Buy Signal That Just Flashed
These are surprisingly positive signs for a stock market that’s expected to see another -4.6% earnings decline in the second quarter. It tells us that Wall Street analysts have become overly pessimistic in the near term, which has unnecessarily dragged retail investor sentiment along with it.
In other words, they’re missing the enormous Q3 and Q4 recoveries we expect.
In a recent update, Luke Lango notes that the “Coppock Curve,” a momentum-based indicator, is now signaling a “Buy.” The Coppock Curve, Luke tells us, was designed to identify major shifts in market trends – from positive to negative (sell signal) or negative to positive (buy signal).
The same buy signal was triggered as stocks were coming out of the Covid-19 crash, the 2008 financial crisis, and the dot-com crash. It was essentially the “all-clear” sign in each of those major bear markets that the worst was over and better times were ahead.
Stocks have been consistently rising for so long now (about six months of steady gains), Luke says, that history suggests this isn’t just a head fake.
Where Will Markets Go? Look at Bank Stocks.
When I started my career on Wall Street, I was taught that bank stocks tend to reflect the economy itself, especially in emerging economies.
If the Thai economy was performing well, its banks would reap the benefits. And if the Greek economy saw a slowdown, we needed to sell every Greek bank immediately and go on vacation.
It’s a lesson that’s proved very, very true — and saved investors a lot of money!
However, it turns out the same principles are also true for developed economies like the European Union and the United States. Rising earnings are a generally positive sign for the economy, while falling ones are a negative one. The decade-long slump in European banks in the 2010s coincided with anemic economic growth.
Today, U.S. bank earnings are telling us to expect a major rally in consumer-facing stocks.
This month, we’ve seen enormous earnings surprises from regional banks and diversified ones, from Western Alliance to JPMorgan Chase (NYSE:JPM). And the earnings misses we’ve seen, like from Goldman Sachs (NYSE:GS), are more self-inflicted issues than anything else.
It’s a sign that borrowers are in far better health than most believe, and that the market’s expectations for a profit-stopping recession looks overblown. In this “tale of one market,” the story you really need to know is that earnings are telling us that it’s time to buy cyclical stocks once again.
On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.