Over the weekend, Goldman warned that "cognitive dissonance exists in the US stock market" as "investors must reconcile S&P 500’s performance with negative EPS revisions from sell-side analysts." Specifically, Kostin notes that the "S&P 500 has returned 10% since Election Day while consensus 2017E adjusted earnings have been lowered by 1%", and predicts that "investors will soon de-rate their expectations of potential 2017 EPS growth as they face the reality that the accretive impact from tax reform will not occur until 2018." The bank also cautioned that "we are approaching the point of maximum optimism and S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected."
Now, according to the latest weekly BofA client data, "smart money" investors have indeed tempered their euphoric optimism, and last week during which the S&P 500 climbed to another new high, BofAML clients took advantage of the surge in "greater fools" and turned net sellers of US equities for the first time since the week prior to the US election in early November.
BofA's Jill Carey Hall reports that net client sales of $2.1 billion were the largest since June, with net sales of single stocks eclipsing small net purchases of ETFs. Sales were broad-based across size segments and client types, and this was the first week of selling by private clients since January.
- Hedge funds have been net sellers of US stocks on a 4-week average basis since early Feb. 2017.
- Institutional clients have been net sellers on a 4-week average basis since early Feb 2016.
- Private clients have been net buyers of US stocks on a 4-week average since early Jan 2017.
- The 4-week average trend for buybacks by corporate clients suggests buyback activity picked up in 4Q, after weak trends in 3Q, but has slowed YTD
Meanwhile, in a surprising twist, buybacks by corporate clients slowed to a six-week low, and year-to-date are tracking the lowest of any comparable period since 2013. This contradicts recent data by Deutsche Bank which over the weekend speculated that buybacks are back, a move which would explaing the market's surge to new all time highs, even as the smart money has resumed selling.
As the BofA chart below shows, buybacks on a trailing 12-month basis have been slowing since early 2016. One reason for this is that corporates may be pulling back on buybacks given elevated market valuations and a near-record-low proportion of investors wanting companies to return excess cash to shareholders .
Some further details from BofA's client transactions report:
Clients continued to buy ETFs last week, though purchases of ETFs were their smallest since the week prior to the election. And after the previous week’s buying of cyclical stocks and selling of defensive stocks, clients sold stocks across all sectors except Materials last week. Consumer Discretionary, Industrials and Staples stocks saw the largest net sales. Utilities has the longest selling streak, with outflows for the last four weeks, while only Materials has seen two weeks of inflows. Based on less-volatile four-week average flows, Health Care has seen net sales since last March, while Financials and Tech have the longest buying streaks (since early Jan 2017). Institutional clients, private clients and hedge funds were all net sellers last week, with outflows across all three size segments.
Finally, four-week average trends by sector:
- Net buying: ETFs since early Oct 2016; Financials, Tech and Telecom since mid-Jan. 2017; Energy since early Feb. 2017.
- Net selling: Health Care since mid-March 2016; Materials since mid-July 2016; Utilities since mid Nov 2016; Consumer Discretionary since mid-Jan 2017.
- Notable changes in trends: Industrials and Staples are now seeing net selling again after brief periods of net buying; Real Estate (not shown—history since early Sept. 2016) is seeing net sales after net buying since early Jan 2017.