What will happen to Canadian bank stocks in a recession?

A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Bespoke Investment Group notes a sharp drop in investor confidence in a New York Fed monthly survey:

“As the equity market has weakened this year amid higher inflation and the Fed’s rate hike cycle, consumer sentiment towards the stock market has been declining, but the pace has really picked up in the last two months taking the total percentage of consumers expecting higher stock prices to its lowest level (33.8%) in the history of the survey. Put another way, just about two-thirds of US consumers expect stock prices to remain flat or decline over the next 12 months. Add this to the long litany of other sentiment surveys showing investors and consumers alike have little confidence in the stock market.”

I am sorely tempted to view this as a contrarian signal that the market is close to bottom but we still have that problem of earnings estimates being too high (see Goldman Sachs excerpt below).

“Bespoke: “Total percentage of consumers expecting higher stock prices to its lowest level (33.8%) in the history of the survey” – (research excerpt) Twitter

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Scotiabank analyst Meny Grauman discussed the effects of a potential recession on domestic bank stocks.

“As the odds of recession climb it is only natural to ask what this means for Canadian bank stocks. But while even the mildest of recessions would not be a positive for the shares, just how bad things can get will largely depend on what kind of recession we are likely to experience. It has become popular to talk about “recessions” as a monolith, but …. not all recessions are created equal. And while scenario analysis appears to be a budding cottage industry, missing in most of this bank scenario analysis is the acknowledgment that the coming recession (if it does in fact come) is likely to have relatively moderate financial implications for banks given the tightness of the post-pandemic labor market. As a result, while we believe that investors need to be braced for a material slowing in banks’ revenue growth, a dramatic deterioration in credit (and capital ratios) is highly unlikely in our view.”

The labor market point is interesting – banks won’t get hit as hard if the unemployment rate stays low.

“Canadian bank stocks and potential recession (Scotiabank)” – (research excerpt) Twitter

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Goldman Sachs chief US equity strategist David Kostin becomes the latest prominent pundit to warn on earnings estimates.

“Focus has shifted to the 2Q earnings season as investors grapple with whether or not the US economy is headed into recession. Consensus expects 2Q S&P 500 EPS growth of just +6% year/year. While firms will likely clear this low bar, we expect cautious commentary will prompt cuts to forward estimates. In our baseline, assuming the economy avoids recession, we forecast EPS growth of +8% in 2022 (vs. +10% for consensus) and +6% in 2023 (vs. +9%) and a rise in the S&P 500 index to 4300. In a moderate recession, our model implies 2023 EPS would fall by 11% to $200 (vs. current consensus of $250). Assuming consensus EPS estimates move halfway (to $225) by year-end, a 14x P/E would bring the S&P 500 to 3150.”

“GS: The EPS estimates are too high” – (research excerpt) Twitter

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Diversion: “This Is the Picture Astronomers Have Been Waiting For” – The Atlantic

Tweet of the Day: “Asset managers and hedge funds have been boosting their short positions in US equity futures. @DeutscheBank” – Twitter

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