Deutsche Bank Asks "Is The S&P Ready For Rate Hikes?" (Spoiler Alert: No)

Tyler Durden's picture

Despite plunging macro data and stumbling earnings expectations, Deutsche Bank's (reluctantly less sanguine) strategist David Bianco notes that ECB QE, and a still accommodative Fed managed to push the S&P to 2100. However, as he explains below, policy normalization risks remain, particularly for the dollar and long-term yields. We don't see a quick recovery for oil prices. Strong job growth and falling unemployment despite still slow GDP suggests that Fed hikes are on the horizon and likely strengthen the dollar further. We see risk of a near-term 5-9% dip and reiterate the importance of sector preferences.


Via Deutsche Bank,

Ten Most Frequently Asked Questions By Investors:

1) How expensive is S&P? 17.8 trailing and 17.3 fwd PEs are 10-15% above history, median PE is high at 18.9. Trailing PE is 19.7 ex. 25 low PE mega-caps.


2) Is an 18 trailing PE sustainable and is there upside? Yes, if long-term Tsy ylds don’t exceed 3% the rest of the cycle. But at ~18x fwd EPS, future annual price gains likely only ~5%. Near-term, we see risk of a 5-9% dip as job gains make a midyear Fed hike likely, further boosting the dollar with more EPS cuts.


3) Which sectors have the most PE upside? Big-cap Tech and Health Care. The earnings share of Tech & HC in the S&P has doubled since 1980 to 33%. We expect these two sectors to lead S&P gains for the rest of this cycle on decent EPS growth (despite FX) and more PE upside; their PEs are in line w/ S&P now.


4) Which sectors and industries benefit from low oil prices and which suffer? Consumer Staples, Con. Discretionary and some Transports (Airlines) benefit; Energy, Capital Goods, Metals & Mining, many Chemicals and Utilities suffer.


5) Is the 10%+ record high S&P net profit margin sustainable? Yes, but likely at a plateau. We see margin pressures at Energy and Industrials partially offset by upside at HC and Cons. Discretionary. Financials margins should be flattish.


6) Are S&P payouts sustainable? Yes, but we expect a shift from buybacks to dividends over time. S&P pays out 63% via dividends + buybacks. We expect $400bn dividends and $450bn net buybacks in 2015 funded w/ an est. $850bn FCF. S&P has $1.6tr of gross cash and its net debt/mkt cap is at historic lows.


7) Have S&P companies driven EPS growth mostly with buybacks? Only 20% of S&P EPS growth or 1.6% is from buybacks since 2012. Net dollars spent on buybacks is running at ~2.7% of S&P market cap, but this overstates share count shrink and EPS growth impact given shares issued via option discounts.


8) How will equities (PEs) and long-term interest rates react to Fed hikes? We think the Fed hikes through 2016, but will signal intentions not to exceed 2% unless unit labor costs accelerate. Hikes can help limit the climb in LT yields and flatten the curve through 2016, if a stronger dollar keeps US inflation low and global real interest rates stay 0-1%.

We think this hiking cycle is nothing like any experienced before and the key to PEs will be how LT yields react. But in the meantime, EPS risk remains to the downside on FX, whereas the debate on magnitude of Fed hikes and how bond yields and PEs react will last all year.


9) Should small caps be bought into hikes and which ones? Small caps could outperform near-term if S&P avoids a dip. The R2’s PE premium vs. S&P and its history is still rich, but more reasonable on 2015 EPS given stronger growth than S&P. Industry tilts remain crucial. A flat curve will challenge small banks.


10) What’s the capex outlook? We expect near 5% capex growth within overall US GDP in 2015 with the big drop in Energy capex partially offset by better Tech spending. We expect overall S&P capex to be flattish at $700bn in 2015 with Energy sector capex (1/3 of total) down 15-20%, but up ~5% elsewhere.


*  *  *

EPS Revisions year-to-date are not positive...


Finally, Deutsche shows their "Seven Signs" is starting to tilt negatively... 2 Red (not safe/caution), 3 Yellow (neutral), 2 Green (safe). Key risks to stocks are a further slide in oil prices or Euro (EPS risk).


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flacon's picture

I don't think anybody's going to mess with Chuck Schumer's cash cow. Politicians and bankers are one and the same. They will redefine the S&P to make sure it doesn't tank. 

ParkAveFlasher's picture

charts charts charts charts just btfd

Yen Cross's picture

  Typical Douche Bank fodder...

fed_depression's picture

One week from now is already too late. Euro and Japan currencies are failing. The Fed will probably keep patient in. And maybe Yen and Euro recover 300 pips at best case before being sold back into the ground.


If I'm correct Yen should bust through 122 tonight and it should never look back. Panic has already started.

Dr. Engali's picture

Shit cracks me up. Just the thought of raising rates is blowing up currencies around the globe and these fed heads may actually believe that they can raise rates without blowing the whole system up.

Yen Cross's picture

Doc, even if they raise rates I think it's a sell the news scenario. The front running has been so extreme, that I think the risk is actually to the downside. The Fed. isn't going to do anything but jawbone though.

The stronger the $usd gets the more overvalued U.S. equities become.(lower nominal value) for foreign investors. That's why the DAX has been going hyperbolic, from the carry and nominal advantages. The euro selloff has been so extreme, that it's going to retrace here very soon.

TheReplacement's picture

You're one of those buy-low-sell-high lunatics aren't you?

davidalan1's picture

I think we can all agree that if you take away the dope. cocaine, emails, servers and punch bowl this party is OVAH? no? Or is it just me?

interesting times indeed.

God forgive me for I have sinned.

Evil Bugeyes's picture

Didn't DB just fail the Fed's most recent stress test?

But they can't just say: "We are levered out to the max and rate hikes would kill us."  Saying "Rate hikes might not be good for the S&P" doesn't sound so self serving.

gcjohns1971's picture

DB is one of the Fed's owner-banks.

When your owner needs the printing press...he gets it.

When they want to 'create inflation' what they really mean is that they need to shrink the relative value of the loans on the banks' books relative to the real assets in society.

Their struggle is that this also (necessarily) shrinks the value of the financial sector, whose ownership is mostly virtual (paper assets).  So, I think they are conflicted...

thismarketisrigged's picture

damn tylers, would u have to spoil the answer for me in the title


just kidding, this shit is so obvious, they can never raise rates without crashing the entire system. 


this is going to be looked back upon as an historic time in the history of financial systems. this system when it explodes, it will be a sight to see.

TheReplacement's picture

just kidding, this shit is so obvious, they will never raise rates until they are ready to crash the entire system. 


this is going to be looked back upon as an historic time in the history of planetary systems. this system when it is exploded, it will kill us all.



I think my version is probably more righter.

Chad_the_short_seller's picture
Chad_the_short_seller (not verified) Mar 11, 2015 7:43 PM

Even if the fed raised rates, who's to say they wouldn't buy the fuck out of the market and prevent it from crashing? Don't think that can't happen? Think again!!!

Bastiat's picture

Is anyone ready for higher interest rates?  Consumers, governments, corporations, banks, the fed, student loan holders, the housing market?

Bastiat's picture

But everyone is ready for an endless stream of jawboning bullshit from the thieving bastards.

venturen's picture

There are mountains of DEBT EVERYWHERE and some volocanic event is going to happen and all is going to wash away when the MT Saint Helen of DEBT liquiidates everything in it path!

orangegeek's picture

2) Is an 18 trailing PE sustainable and is there upside? Yes, if long-term Tsy ylds don’t exceed 3% the rest of the cycle. But at ~18x fwd EPS, future annual price gains likely only ~5%. Near-term, we see risk of a 5-9% dip as job gains make a midyear Fed hike likely, further boosting the dollar with more EPS cuts.


Fair enough.  Problem is that Europe is selling NIRP bonds.  So any non-NIRP bonds from a RELATIVELY stable  source is a deal - enter ZIRP US bonds.  If the Fed manipulates rates higher, the EURO will tank faster - expect to see a 50 cent Euro shortly thereafter.


There's no rate hike coming.  And the rising USD is going to crush US indexes all by itself.

gcjohns1971's picture


1) FED Rate hike is linked to Euro QE

2) QE effectiveness in driving up prices was limited due to globalization.  Instead of driving up prices it creates flows from areas where there is QE to those where there is no QE.

3) Theoretical Linkage between ECB QE and Fed Rate hikes are intended to control the flow of money, to get the desired results in each place - higher inflation in US & Euro area.


What do you think?  Plausible?   Is this about limiting capital flight to maximize inflation?

It would seem to portend that any rate hike will be a timid placebo, at best, while behind the scenes the CB's plan a more lock-step monetary expansion.


If this idea is right, then where will money flee to?  Where can it?  They want to drive up general (not just stock) prices to make the debts on their books more manageable.

If they are successful, and if I've properly identified their method it will go in to....

... commodities. (Because where else will be left???)