Hey, Ross here:
Stocks finally hit some selling over the past few days.
After a strong couple of weeks, we’ve now had three red days in a row.
Nothing shocking about that.
The question is whether this is just some profit-taking after a good run…
Or the start of something bigger.
These two charts give us a pretty good read.
Take a look:
Chart of the Day
This is Bank of America’s latest survey of global fund managers.
And heading into this week, investors were leaning pretty heavily toward stocks.
A net 56% of fund managers were overweight equities – the highest reading since November 2021.
Cash had fallen to just 3.5%.
So after the run we’d just had, a few red days aren’t exactly coming out of nowhere.
There were already a lot of investors on the same side of the trade.
But now look at what’s happening with earnings:
This tracks forward earnings estimates across the large-cap S&P 500, the mid-cap S&P 400 and the small-cap S&P 600.
All three are still sitting at record highs.
So we’ve got prices pulling back after a crowded run…
While earnings expectations are still pushing higher.
What do we make of that?
I explain below.
Insight of the Day
Don’t confuse a crowded trade with a broken one.
A good trade can get overcrowded.
In fact, that’s pretty normal after a strong run.
More people get bullish.
Cash gets put to work.
Eventually enough investors are already in that it doesn’t take much selling to knock prices back.
That’s why I don’t automatically assume a few red days mean the whole picture has changed.
I want to see what happens next.
If this weakness starts showing up in the earnings outlook too, I’ll pay attention.
Analysts cutting numbers.
Profit expectations rolling over.
Companies giving us reasons to expect less from the next few quarters.
That would tell me something beyond the fact that stocks had gotten crowded.
We’re not seeing that yet.
Forward earnings are still at record highs across large, mid and small caps.
So for now, I’m treating the last three days for what they are:
A pullback after a strong run.
If the evidence changes, so will my view.
P.S. If the overall market keeps pulling back, stock selection becomes even more important.
So here are all the details on a stock that Peter Thiel just bet $76 million on.
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