The excellent Michael Wilson at Morgan Stanley.
Testing Critical Levels
Our equity strategy framework incorporates several key components: fundamentals (valuation and earnings), the macro backdrop, sentiment, positioning and technicals. Depending on the set-up and one’s time frame,each of these variables can have a greater weighting in our recommendations than the others at any given moment. During bull markets, the fundamentals tend to determine price action the most.For example, if a company beats the current forecasts on earnings and shows accelerating growth, the stock tends to go up,assuming it isn’t egregiously priced. This dynamic is what drives most bull markets: forward NTM earnings estimates are steadily rising with no end in sight to that trend. During bear markets,however, this is not the case. Instead, NTM EPS forecasts are typically falling. Needless to say, falling earnings forecasts are a rarity for such a high quality, diversified index like the S&P 500 and are why bear markets are much more infrequent than bull markets. However, once they start, it’s very hard to argue they’re over until those NTM EPS forecasts stop falling.
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