Here’s what just happened that causes stock market crashes 71% of the time, Credit Suisse warns

Wall Street is in an unusually bullish mood Tuesday morning.

Tim Holland, chief investment officer at Orion Advisor Solutions, argues that the market has just hit two peaks. Last week, the Labor Department finally reported a slight decline in inflation as a measure of individual investor sentiment showed the highest percentage of individual investors who were bearish since 2009.

“If we have seen a spike in inflation and a spike in investor pessimism, the way forward for the market should be much more constructive,” Holland said.

Not everyone is convinced. London-based Credit Suisse’s global strategy team has been cautious on equities since February, and still is. They say that the risk of a recession remains very high and that there are no advantages to their fair value models. Importantly, the risk to corporate earnings remains high.

“Earnings revisions have started to fall and 71% of the time when this happens, markets fall during the next quarter. Current PMIs imply an additional significant downside for revisions. We see a clear risk of negative EPS in 2023,” said the strategists led by Andrew Garthwaite.

Sure, the markets have bottomed out after a roughly 19.5% drop from their peak – the intraday low in the S&P 500 SPX.
that was reached last Thursday, but on three of those four occasions, the Fed was easing.

For the Credit Suisse team to become bullish, clear signs that the Fed’s hikes are constraining the economy would be needed, more or less.

“What do we need to see to be more constructive? Clear signs of slowing US wage growth, US leading indicators falling sharply, indicating the Fed needs to do less to bring unemployment above full employment, signs of a new paradigm shows that margins can stay high even when nominal GDP slows [8 percentage points]clear underestimation of [equity risk premium] model, or credit spreads discounting a recession,” Garthwaite and team said.

The buzz

Hong Kong-listed stocks, including JD.com JD,
alibaba slime
and NetEase NTES
surged as Shanghai laid out plans to reopen from its strict lockdown, including a full reopening by June 1.

Elon Musk, on Twitter, of course, said that his offer for the social networking service TWTR
it can’t move forward until the company provides more details on the proportion of spam accounts. CEO Parag Agrawal says he is confident spam accounts make up less than 5% of the user base, and the company said it was “committed to completing” the $54.20 per share deal in a proxy statement. Separately, Musk may be selling shares in SpaceX to help finance the offering, the New York Post reported.

It’s a big day on the retail front, as Home Depot HD
reported a surprise increase in same-store sales growth, but Walmart WMT
stocks are hit by an earnings loss and a downgraded outlook. The April retail sales report showed an increase of 0.9%. Industrial production and a report on homebuilder sentiment will also be released.

Federal Reserve Chairman Jerome Powell is due to appear at 2 pm ET at The Wall Street Journal’s Future of Everything festival. A host of regional Fed chairmen, from the aggressive James Bullard to the dovish Neel Kashkari, will also speak.

Watch interviews with Powell, the CEOs of companies like Wells Fargo, Moderna, and FanDuel. Register for virtual access to The Wall Street Journal’s Future of Everything Festival, May 17-19. (Select a virtual pass for free access).

A wave of 13-F reports from major shareholders was filed with the Securities and Exchange Commission. Berkshire Hathaway revealed new holdings in Citigroup C,
Paramount Global FOR
and Celanese CE,
among others. Chase Coleman’s Tiger Global Management, which has struggled this year, raised the stakes on several tech plays, including CrowdStrike Holdings CRWD,
Sea SE,
Snowflake SNOW,
Service Now NOW
and Carvana CVNA.

The markets

Markets appear to be flying higher as US Equity Futures ES00

NQ00
rose and the dollar dxy
it fell.

The best tickers

Here were the most active stock market tickers at 6 am ET.

The graphic

Correlation does not mean causation, and dual Y-axis plots can be manipulated to show closer correlations. So, with all those caveats in mind, US economists at Natixis point to the close correlation between mortgage rates and house prices, pointing to a perhaps acute wealth effect risk.

They do note, however, that the steep house price slowdown might not be as steep as the chart suggests, due to the national housing shortage from both the pandemic housing boom and ongoing supply chain issues. A mid-single-digit correction in house prices over the next year “is entirely reasonable.”

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