Société Générale’s chief world strategist, Albert Edwards, isn’t identified for his optimism. The Wall Avenue veteran made a reputation for himself in monetary papers in 1996 with a daring prediction about an “ice age” of financial stagnation and unfavorable bond yields within the West that proved at the very least partially appropriate. And lately, Edwards has been the uncommon voice from finance legitimizing the controversial time period “greedflation”—the criticism of companies for utilizing rising materials prices throughout the pandemic and struggle in Ukraine as an “excuse” to spice up their revenue margins. In April 2023, his lament in regards to the financial affect of company greed rang out throughout the Avenue: “We could also be trying on the finish of capitalism.”
Whereas many economists argue that the rise in company income throughout the inflationary post-pandemic lockdown interval wasn’t a results of greedflation, however moderately an ordinary a part of the cyclical nature of income throughout enterprise cycles. Edwards stated final June that, in his view, this time actually is completely different. “Greedflation is a controversial subject. For me it’s easy—I can discover no precedent in historical past (together with the inflationary Seventies) throughout which unit prices have risen sharply and but unit income have additionally risen, besides on this cycle,” he wrote in a observe to purchasers. “Issues actually are completely different this time.”
Now, Edwards, who has been forecasting a recession for years, is popping his consideration to the hype surrounding synthetic intelligence—and, as ordinary, he’s not satisfied.
“Each bubble has a compelling narrative,” he wrote in a Thursday observe. “The present narrative facilities on the anticipation of an AI-driven surge in company income to completely justify the present stratospheric valuations. These of us who lived by means of the late Nineteen Nineties [tech] bubble have heard all of it earlier than and roll our eyes skyward.”
Edwards stated that the speculation that Al will drive a company revenue growth is “fully believable,” however he hasn’t seen sufficient earnings development to again it up. In a bid to measure “momentum” in earnings development, the strategist regarded on the share of Wall Avenue analysts’ S&P 500 earnings per share (EPS) forecast modifications that have been upgrades, moderately than downgrades. He discovered that within the fourth quarter of 2023 round 48% of analysts’ EPS estimate modifications have been upgrades, in contrast with practically 80% in early 2021. Equally, a six-month shifting common of the EPS improve share exhibits a transparent pattern of fewer analyst upgrades on the finish of final yr.
“All I can say is that for analyst optimism on the S&P to have topped out solely at 50% earlier than subsiding is just not the stuff of regular cyclical recoveries, not to mention an AI ‘new period,’” Edwards wrote. “However it’s the downtrend that catches my eye. Is that this anemic income backdrop actually in line with the S&P rising by one-third in a yr?”
Societe Generale, Albert Edwards
It’s not AI driving markets, it’s ‘unfastened’ financial coverage
Edwards argued Thursday that whereas many consultants consider shares’ practically 10% year-to-date rise has been pushed by the potential for AI to spice up earnings, “it could merely be excessively unfastened financial coverage that’s the key cause why the S&P is at document highs.”
Regardless of elevating rates of interest to combat inflation and decreasing the scale of its steadiness sheet, the Fed is definitely rising the U.S. economic system’s financial base, in line with Edwards. Which means financial coverage isn’t as tight as many think about. The much-ballyhooed finish of the “straightforward cash” period doesn’t imply that cash has been exhausting to return by, in different phrases, at the very least for now.
“It’s a joke to even counsel that financial coverage is restrictive,” Edwards argued, noting that the Fed’s cash market operations are “pumping sufficient liquidity into the system” within the type of diminished reverse repos to greater than offset the affect of the Fed’s efforts to suck “straightforward cash” out of the economic system by means of a course of known as quantitative tightening. Therefore, he concludes, there was a rise in “base cash” whilst quantitative easing has shifted to tightening.
As for the inventory market rally, Edwards stated, “perhaps it’s all about Fed-induced liquidity in spite of everything” and the AI growth is only a narrative that is smart of the pattern.Subscribe to the CFO Each day e-newsletter to maintain up with the tendencies, points, and executives shaping company finance. Join free.