Banking Upheaval Leaves Wall Street Clueless About Pricing

Are you trying to figure out what all this financial stress has to do with the market? It is the same for professional forecasters as well.

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Despite the speed and fury with which the news has been released, stock strategists and analysts who have been following the earnings reports have responded with the same response: none at all. The estimates remain almost exactly where they were just before all the action erupted, regardless of whether the analysts are unwilling or unable to commit to a new course of action or unsure there has been much change.

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In Wall Street strategy organizations, where macroeconomic trends are used to predict market trends, it is possible to find the stasis most obvious. Despite their continued inaction, their average year-end target value for the S&P 500 has remained unchanged for a third consecutive month, a streak of inaction not seen since 2005. 

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Although the stillness of the market could be used as a sign of conviction, it most likely represents confusion regarding the direction the economy and the market are headed in. Data compiled by Trade Algo show that there is a wide gap between the lowest and highest year-end targets for the S&P 500 index at this time of year: at 47%, that's the widest gap in two decades for this time of year. 

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As Michael Purves, founder of Tallbacken Capital Advisors, explained to me, this is a series of slow-motion events with uncertain outcomes. As far as the regional bank crisis is concerned, we are unsure of the extent to which it is contagious. We have no idea how the government would respond if it accelerated. And we don't know to what extent a freeze-up in lending will affect earnings. 

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There was the little real reaction when it came to the banking turmoil, in contrast to big money managers who did not hesitate in adjusting their positions quickly. In the wake of cross-asset volatility, long/short hedge funds that seek safety in technology mega caps have dumped financial shares and unwound some positions, including some longs in financial shares they were long, according to data compiled by Goldman Sachs Group Inc.'s trading desk on a weekly basis. 

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Currently, hedge funds are holding cash for 15 straight months, hedge fund net equity exposure remains below the 19th percentile, and commodity trading advisers have turned from long to short around $130 billion of futures, according to the firm's data.

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“There is still a lack of conviction almost everywhere but at least positioning matches sentiment for the first time in a long time." Bobby Molavi, a managing director at Goldman Sachs, wrote in a note.

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As the S&P 500 has shown itself to be profitable in recent weeks, sitting still has been rewarding as well. It has gained for the second straight week, almost erasing its entire loss from March 8, the day before regional banks plunged. The worst volatility in four decades has dealt tremendously to short sellers, but they would’ve made a substantial profit had they stayed put through the worst volatility.

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Traders did not want to push the market in any direction on Tuesday. The S&P 500 was trapped in a 0.7% band, the smallest intraday range since November, as of 8 a.m. in New York time, and futures were rising 0.8% as of that time.

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It has always been difficult for the Fed to pull back from its aggressive inflation-fighting campaign in the face of so much dangling in the balance. While the banking crisis may lead to tighter lending standards that negatively affect the economy, the specter of a recession increases the probability that it will be close to being done with the program. 

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Despite the failure of Silicon Valley Bank and others, analysts haven't changed their forecasts for corporate earnings for 2023. 

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Many may be waiting for guidance from company management before making adjustments to their numbers as first-quarter earnings are scheduled to begin in about two weeks.

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Nicholas Colas, the co-founder of DataTrek Research, says markets have extrapolated the US economy and labor market resiliency to mean corporate earnings can remain strong. In the first half of Q2, we will get Q1 earnings reports and management guidance.