Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts

Category: Economics
Author: James J. Valentine


by ryansmccoy   2018-12-20
Let's be completely honest for just a second, the left-leaning/never-trump news sources (i.e. nytimes, wapo, bloomberg, reuters, possibly the economist) are clamoring for a recession and right-leaning/pro-trump news sources (i.e. foxnews, maybe wsj) do not see a recession in sight.

In the most recently reported quarter, Q318, the S&P 500 saw Earnings growth +28% Year-over-year (IBES) and Sales Growth +8.5% Year-over-Year. On a forward looking basis (the more important indicator), estimates for 2019 are currently at Sales Growth +5.6% Year-over-Year and Earnings growth of +8.5% Year-over-year (which is a more normalized trend, remember tax-cuts will become a head-wind in 2019).

IMO, the two biggest risks to the market, 1) China Trade Deal, 2) Slowing of Raising of Interest Rates. If you see progress in either of these, I think you'll see the market follow in suit. In terms of what's currently priced into the market, I'd say that a more pessimistic scenario is currently being priced in and thus risk/reward favors the upside.

IMO, the markets have a psychological component to them and the fear of an upcoming recession can cause a recession. So, these articles are like adding fuel to a fire, "Recessions have psychological and confidence aspects. For example, if companies expect economic activity to slow, they may reduce employment levels and save money rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession." [1]

Finally, I think the following excerpt, written by a former Morgan Stanley Equity Research Analyst, does a great job at explaining how one might approach analyzing the news:

"Be skeptical, very skeptical, and even more skeptical. Great analysts rarely accept anything at face value. ... Good Analysts always challenge what they've been told or given. Over time, if a source of information proves accurate, let it into your circle or trust. If we include the financial press, and everything distributed by companies, I'd say at least 75% of the information out there for consumption is misleading or omits an important piece of information relative to the topic." [2]