Don’t have time to dig through analyst reports and read hundreds of pages?
Still want the critical insights so you can invest better and communicate with others about the markets?
Below is the first edition of a weekly roundup of analyst insights from Wall Street to Bay Street.
The Case for Lower Yields (and Bond Outperformance)
Francis A. Scotland, Director of Global Macro Research, Brandywine Global
Real interest rates are very high, and inflation is on a fast track lower. A fading fiscal policy impulse, the lagged effects of tight money kicking in over the next year, and more post-pandemic normalization of special factors ought to be the catalysts for some bond market mean reversion. We never thought a recession would be necessary if inflation normalized and the Fed pivoted in time to avoid a crunch. While the rate mantra for many is higher for longer, we think a mantra of lower for longer applies to inflation. How all these variables play out ahead is less clear with the interference coming from government spending. Equilibrium interest rate levels in the post-pandemic era could be higher than the post-GFC regime, but current market rates already seem extremely high. Furthermore, we expect the pace of nominal activity to slow significantly over the next year. Given this outlook, we believe the risk/reward profile favors the bond market. While the scale and timing of meaningful mean reversion lower in bond yields is unclear, the risk of even higher yields at this stage seems dramatically reduced.
Is the Soft Landing Priced Into Equities?
Jan Hatzius, Goldman Sachs
After climbing the wall of worry for most of 2023, equity markets have lost momentum in the last month despite the positive economic news. The reason probably lies in the twin constraints of high valuations and rising Treasury yields. These could loosen if earnings start to move up more significantly and/or our rates strategists’ forecast of modest declines in long-term yields plays out. That said, our equity strategists’ forecasts imply that the bulk of this year’s soft landing and AI rally has probably been realized at this point. Along similar lines, our credit strategists expect both IG and HY bonds to deliver modest further excess returns in what is likely to be a broadly stable spread environment, while our FX strategists predict shallow dollar depreciation into yearend. Lastly, oil prices have converged to the bullish views of our commodity strategists, who are now calling for a broadly sideways move in the remainder of 2023.
Earnings Recovery: Is the Consensus Wrong?
Javier Corominas, Head of Global Macro Strategy at Oxford Economics
The consensus forecast expects a sharp recovery in profit margins over the next few quarters, which we believe is unrealistic against a backdrop of moderating end demand.
Recent business surveys and employment cost data suggest margin pressures are easing, but not to the extent that would allow for a significant improvement in profitability without an acceleration in activity.
Indeed, our profit margin leading indicator – which combines cyclical indicators with measures of corporate pricing power – highlights the risk of further downside for margins in the near term.
The Case for Recession
Jeremy Grantham, GMO cofounder
- In the end, life is simple. Low rates push up asset prices. Higher rates push asset prices down. We’re now in an era that will average higher rates than we had for the last 10 years.
- The Fed’s record on these things is wonderful. It’s almost guaranteed to be wrong. They have never called a recession – and particularly not the ones following the great bubbles.
- AI is very important. But it’s perhaps too little, too late to save us from a recession. The deflationary forces from the tech stocks breaking in 2021 — probably too big. The power of interest rates rising and depressing the real estate market — very negative, slow-moving influence. I suspect that they will once again dominate, and we will have a recession running perhaps deep into next year, and an accompanying decline in stock prices.
Is AI Coming to Get You?
Yann LeCun, VP and Chief AI Scientist at Meta
Reporter asking LeCun: Why do you think your viewpoint on this diverges so drastically from the other godfathers of deep learning, Geoffrey Hinton and Yoshua Bengio?
LeCun’s Answer: Geoff believes LLMs are smarter than I believe they are, and he’s a little more optimistic than I am about how they might get us to human-level AI. So he realized, all of a sudden, “We need to worry about superintelligent machines. If you have a more intelligent entity, it is going to want to take over the world.”
And I think that’s just wrong. There’s no correlation between being intelligent and wanting to take over. Even within the human species, it’s not the most intelligent among us who want to be the leaders. In fact, it’s quite the opposite, mostly.
The desire to dominate is really attached to species that are hierarchically organized and social. It’s really a consequence of human nature and the fact that evolution built us this way. But orangutans, for instance, are not a social species, and don’t have any desire to dominate anybody. They don’t need to. So we can be smart, like orangutans, without having any desire to dominate.