As second quarter earnings season begins, companies are slashing earnings guidance at rates not seen in the last three years.
Tobias Levkovich, who heads Citi’s U.S. equity strategy research, points out in a note to clients that only 30 per cent of recent Wall Street analysts’ earnings estimate revisions have been positive.
The two times this number was lower in the last 13 years, the U.S. economy was in recession. Note that the ratio has taken a cliff-dive recently while the S&P 500 remains elevated:
However, Levkovich doesn’t believe this is a signal of an impending recession, but an opportunity to buy stocks. He writes in his note:
We continue to see data such as the Citi’s Major Economies (G10) Economic Surprise Index getting to prior lows (excluding the credit crisis period of 2008), implying that investors fears are being put into future growth expectations and some positive surprises could drive stock prices higher (see Figure 12). In the interim, sentiment, valuation and intra-stock price correlation are sending buy signals and investors should be taking advantage of recent equity market weakness.
Here is the Citi Economic Surprise Index Levkovich refers to, which also hit fresh lows.