US equities still considered overvalued as investor confidence drops

Despite what Corbin Advisors says was the worst December stock market performance in the US since the Great Depression, new research from the firm shows that half of investors believe US equities are still overvalued, as expectations for a number of KPIs – including organic growth, EPS, free cash flow and margins – have fallen to the most pessimistic levels since December 2015.

Investor confidence dropped sharply in Q4 2018, with ‘sentiment and broader findings nearly identical to our December 2015 survey, as investors at that time grappled with slowing growth in China,’ notes Corbin Advisors’ latest Earnings Primer report, based on responses from 85 institutional investors and sell-side analysts around the world, representing more than $595 bn in assets under management. 

‘Tariffs, rising input costs, interest rates and leverage levels are identified as the leading concerns heading into 2019,’ continues the report, with 85 percent of respondents saying they will be placing greater emphasis on operational excellence and balance sheet strength over the coming year. 

The report adds that 60 percent expect corporate outlooks to be weaker in 2019 than 2018, with slightly more than half (51 percent) saying they believe the US is in late cycle – a significant jump from the 31 percent who believed this in Q3 2018. As a result, 40 percent of those surveyed in Q4 suggest US markets peaked in 2018 – a figure Corbin Advisors says has quadrupled from the previous quarter. 

‘Rising input costs – specifically labor costs – in addition to the continuing trade saga appear to have suppressed investor appetite for risk assets,’ says Mark Mandziara, senior managing director at BTC Capital Management, in a statement accompanying the report. This is coupled with the geopolitical aspects of a Democrat-led House in the US, [the] continuing fatigue of Brexit and the changing of the guard in several eurozone countries, all of which further exacerbate uncertainty regarding the outlook for corporate profitability.’

Some sectors – healthcare, most notably – fare better than others, with the research finding that, for the first time in more than two years, utilities and real estate investment trusts are no longer ‘the most out of favor’. Building products, consumer discretionary and financials, on the other hand, have seen the biggest increases in bearish sentiment. 

Regardless of sector or region, however, risk management, balance sheet strength and margin preservation will be the focus for investors, according to Rebecca Corbin, founder and CEO of Corbin Advisors.

‘As we head into the upcoming earnings cycle, the precipitous fall in investor confidence has been rapid and stunning,’ she says in a statement. ‘Still, negative sentiment may be overplayed as the market has priced in a measure of slowing global growth, though a recession does not appear to be reflected yet.

‘It will be important for executives to address growth in the context of risk management strategies, while balance sheet strength and margin preservation will be in focus for investors. Defensive sectors, as well as companies with recession-tested management teams, conservative debt levels and strong operating models will be safe harbors in this volatile period.’