“Balance sheet are weaker versus six months ago not stronger -- yet credit spreads are back to near pre-pandemic levels and the equity risk premium is materially lower,” he said.
The S&P 500’s net-debt-to-earnings ratio, excluding the financial sector, has been climbing over the past six years and now stands at the highest since at least 2003. Meanwhile, both equity and credit issuance have risen this year while share repurchases plunged -- a trend that should be unfavorable to stock buyers.
Even if a majority of customers return to businesses, it won’t be sufficient to bump corporate profits back to pre-Covid levels, Almeida said.
“It’s that last customer that drives all the operating leverage,” he said. “The remaining 10%, 20%, 30% of their customer base hasn’t returned and I don’t think they will until you see immunity.”
Of course, there’s always the bull’s ultimate rebuttal: Don’t fight the Fed. With bond yields near record low, stocks look more attractive. That’s helped push the S&P 500 to near the highest level versus the coming year’s earnings since 2000.
But as painful as the equity rebound has been for professional investors, Almeida doesn’t see much in the Fed argument.
“It works in the near term because money needs to find its home,” he said. “In the longer term, if the asset isn’t supported by cash flow, it isn’t going to work.”
This article was provided by Bloomberg News.