Morgans Stanley with the note:
More risk than reward entering late cycle. While pricing is still moving higher, the rate of change is approaching peak as supply is catching up to demand. Our cycle indicator has shifted out of ‘midcycle’ to ‘late-cycle’ for the first time since 2019 and this phasechange has historically meant a challenging backdrop for forward returns. We expect earnings growth expectations to reverse, near
30% PB valuation contraction and higher chances of positioning reset.
Inflection signposts – sell signals accumulate. We were prepared to become more constructive under the right conditions, but ultimately it is about inflections in the cycle and trajectory of earnings estimate revision breadth – the former approaching an earlier peak YoY pricing and latter approaching negative earnings risk that follows. Our belief is that: (i) the next cyclical downturn begins from
1Q22 and DRAM will stay fundamentally oversupplied in 2022, exacerbated by inventory builds; (ii) recent growth indicators have downticked, while demand held back by component supply; (iii) valuation is no longer compelling on the way down; and tactically buying on the dip no longer makes sense from a quant perspective – we expect better entry points in future.
