Chris’ note: Stocks continue to plummet. But that doesn’t mean you can’t profit in the months ahead.
As I’ve been showing you, the traders we feature at the Cut are racking up triple-digit gains as the bear market rages. In the first half of the year, Larry Benedict subscribers had the chance to make 148.5% on his trading recommendations. And last Friday, Jeff Clark closed out a two-day trade in his Delta Report model portfolio for 300%.
Colleague and former hedge fund manager Teeka Tiwari is also delivering gains in this turbulent market. Last night, he held an urgent briefing all about his strategy.
As you’ll learn from his analyst Michael Gross below, Teeka is aiming to help you make 21 years of S&P 500 returns in 90 days or less even as stocks head lower.
The first half of the year was like a hurricane ripping through your portfolio.
Just about every asset class got crushed – stocks, crypto, even normally stable bonds.
Bonds are supposed to go up when stocks go down… cushioning the blow of a bear market.
But inflation is kryptonite for bonds. It erodes the buying power of the income they throw off. And rocketing inflation has killed bonds this year.
It’s all made 2022 the worst first half of a year for the 60/40 portfolio. That’s the mainstream model that puts 60% of your wealth in stocks and 40% in bonds.
And I have bad news for most investors. We’re headed toward the back half of the storm. That means more stock volatility is ahead in the next six months.
Fortunately, Teeka has a strategy you can use to harness this volatility to keep growing your wealth.
More Trouble Ahead
Second-quarter earnings season began last Thursday. Over the next six weeks, companies will report how they fared between April and June. This will further spook investors.
It may surprise you… but despite the massive sell-off in stocks this year, the average S&P 500 forecasted earnings per share (EPS) – a key measure of profitability – has stayed about the same.
That alone has caused a steep drop in valuations.
Take the forward price-to-earnings (P/E) ratio for the S&P 500. It tells us how many dollars investors are willing to pay for each dollar’s worth of a company’s or group of companies’ forecasted earnings for the next 12 months.
And it’s dropped from 22.7 at the start of the year to 17 now.
The next chart shows the gap between the S&P 500’s forward P/E ratio and forecasted EPS.
As you can see, companies’ forecasted earnings have remained flat. But according to the forward P/E ratio, the amount investors are willing to pay for those earnings has plunged 25%.
Now, EPS is dropping, too. As recession looms, many companies expect lower sales and profits this year.
Last month, 56% of S&P 500 businesses revised their earnings forecasts lower. That’s the highest rate of downward revisions since June 2020, when the pandemic ruined predictions.
We’re already in a bear market. But investors haven’t yet priced in lower earnings forecasts. That suggests stocks have more to fall before they bottom.
Why Earnings Are Sinking
This drop in earnings forecasts makes sense for three main reasons…
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Consumers are cutting spending. In May, inflation-adjusted consumer spending fell by 0.4% from April. We expect that to continue as they realize recession is here and puts their jobs at risk. This will mean lower sales revenues for companies.
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The dollar is getting stronger. In the last quarter, the dollar rose by 6.7% versus a basket of trading-partner currencies. But nearly 40% of the average earnings of S&P 500 companies earn revenues abroad in currencies other than the dollar.
A stronger dollar means more expensive exports. That hurts the bottom line for U.S. exporters such as Exxon Mobil (XOM), Tesla (TSLA), and Procter & Gamble (PG).
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Costs are squeezing margins. Rising commodity and labor prices are raising companies’ costs and squeezing their margins. Plus, rising bond yields mean higher interest payments on new debt. This eats further into profits.
Figures from investment bank Evercore (EVR) show that earnings during past recessions have dropped about 15% on average. At that rate, the S&P 500’s forecasted EPS would fall to $194 in today’s recession.
If its forward P/E ratio stays where it is now, that implies another 15% leg down for the S&P 500.
And if investors turn more bearish… and the forward P/E ratio also drops… stock prices will fall steeper.
This will sting for us as long-term investors. But there’s a way we can take advantage of these conditions to still come out on top.
Explosive Returns
It’s all down to what Teeka calls the “Anomaly Window.” It’s a brief period when volatility in the market kicks up.
This allows you to play normally ordinary, safe blue-chip stocks for explosive returns.
For instance, Teeka used this strategy to give his subscribers the chance at an 82% annualized return on a $1 billion blue-chip stock in just 14 trading days.
And it’s helped his subscribers bank triple-digit-plus returns on other “boring” blue-chip companies.
Like a 350% gain on gold miner Kinross Gold (KGC) in 63 days… 422% on drugstore company CVS (CVS) in 34 days… and 612% on investment bank Jeffries (JEF) in 42 days.
Teeka held a free online event last night about the Anomaly Window phenomenon.
He showed 10,710 of your fellow readers how they can use it to target 21 years of market returns in 90 days or less.
The best thing about this strategy is it works in any market conditions.
So even if the market doesn’t drop as much as we expect, you can still use it to earn income from blue-chip stocks.
You can watch the replay of Teeka’s event here.
Even if you won’t use this strategy, you’ll learn a ton about how to navigate this bear market.
Good investing,
Michael Gross
Analyst, Palm Beach Daily