Bearish on growth expectations

The BAML (Bank of America Merrill Lynch) survey highlighted the fact that investors are very bearish on growth expectations. A net 50% of the respondents expect global growth to weaken over the next 12 months. A record number of investors said that the global economy was in the late cycle.

Fund managers are also bearish about the expectations of corporate profits. A net 41% expect deterioration in corporate profits over the next 12 months, which reflected a plunge of 40 percentage points, the largest one-month drop ever. Due to the ongoing trade tensions, many companies including Broadcom (AVGO) have reduced their guidance. Like Broadcom, RF chips suppliers like Skyworks (SWKS) and Qorvo (QRVO), analog chipmakers like Texas Instruments (TXN) and Analog Devices, and memory chip makers like Micron (MU) and Western Digital (WDC) supply chips to Huawei. All these companies are expected to take a direct hit from the Huawei ban, and that would reflect in their second-quarter earnings and guidance.

As reported by CNBC, BAML’s chief investment strategist Michael Hartnett said that survey respondents “have not been this bearish since the Global Financial Crisis, with pessimism driven by trade war and recession concerns.”

Economic reports point to weakness

The recent economic reports out of the US and elsewhere have been weak lately. The Morgan Stanley Business Conditions Index suffered its biggest one-month decline in history in June by falling 32 points, suggesting a sharp deterioration in sentiment. The US jobs report for May was worse than expected, with job additions growing by just 75,000 and missing economists’ expectation of 180,000. Wage growth also missed economists’ estimate. US consumer price inflation also came in weaker than anticipated.

Gundlach raised recession odds

The so-called “bond king” Jeffrey Gundlach also increased his odds of a recession to 40%–45% in the next six months and 65% within a year. In May, Gundlach had put the probability of a recession in the next year and next six months at 50% and 30%, respectively. US-China trade tensions have soured global sentiment, changing Gundlach’s stance on the odds of a recession.

The survey respondents also feel that the Fed could cut the rates if the S&P 500 (SPY) falls to 2,430 points. They also expect president Trump to agree to a trade deal if the SPY falls to 2,350 points. Currently, the index is trading at 2,920.

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