Posthaste: 'Concern is warranted' — Why CIBC thinks investors should flock to cash

financialpost.com:

Good morning,

The stock market has held up pretty well this year, all things considered.

Before this late summer sell-off, the S&P 500 was up almost 20 per cent from January, despite all the challenges thrown at it.

But CIBC Capital Markets says that may be about to change, and there’s a sound case for investors to increase their cash positions.

Until recently analysts had thought the strength of corporate earnings would be enough to support stock prices, but now they “are witnessing a sentiment change.”

One disturbing signal is that stocks are not responding as they should to earnings beats. In the second quarter of 2023, 79 per cent of 466 companies beat expectations, yet stocks did not react positively to these results, said the report.

“In our opinion, sentiment has shifted from “I’m really impressed by the better earnings” to “is that all you can do for me?”. This quarter’s price reaction to positive earnings surprises was one of the most negative in over a decade.”

The last time this happened at the end of 2019 and 2021 it was followed by poor performance by the S&P 500.

Another concern is that while corporate profitability has held up well amid higher interest rates, inflation and a host of macro challenges, these challenges are not going away, and in some cases are getting worse, says the report.

The shift away from globalization that began with U.S. president Donald Trump has continued under Joe Biden, with near-shoring and friend-shoring increasingly seen as the way to protect supply chains.

Shifting production takes time and investment and there is increased pressure on companies to manufacture in North America often at a higher cost, the analysts said.

Climate risks are also escalating, says the report.