Media & Entertainment

A Kind Of Magic A Kind Of Magic Overweight A number of macro factors have fallen into place that have warmed us to the S&P movies & entertainment index. Consumer confidence remains glued to multi-decade highs and there are high odds that the big gulf that has opened up between confidence and relative share prices will narrow via a rise in the latter (top panel). Moreover, a vibrant labor market with payrolls expanding at a healthy clip (second panel), the unemployment rate and unemployment insurance claims at generational lows, all signal that consumers will keep their purse strings loose, especially given rising wages (third panel). More dollars spent on recreation is synonymous with a margin expansion in the S&P movies & entertainment index (bottom panel). This consumer spending backdrop is also conducive to a rise in relative profitability, the opposite of what the sell-side currently expects. Bottom Line: We lifted the S&P movies & entertainment index to overweight on Monday; please see our Weekly Report for more details. The ticker symbols for the stocks in this index are: BLBG: S5MOVI – DIS, NFLX, VIAb.

Highlights Portfolio Strategy Disney’s recent streaming pricing disclosure and a favorable macro backdrop for recreation PCE argue that more gains are in store for the S&P movies & entertainment index. The price of credit, credit quality and credit growth along with equity buybacks all suggest that bank profits will continue to overwhelm. Recent Changes Upgrade the S&P movies & entertainment index to overweight today. Table 1 Mixed Signals Mixed Signals   Feature Equities continued to defy gravity last week as the earnings season warmed up and did not reveal any “skeletons in the closet”. Lower interest rates single-handedly explain the recent stock market exuberance (Treasury yield shown inverted, Chart 1). In more detail, the Fed’s complete pivot has suppressed the 10-year Treasury yield and last year’s forward multiple drubbing – to the tune of a 30% drawdown – has reversed. Chart 1Lower Yield = Higher Multiple Lower Yield = Higher Multiple Lower Yield = Higher Multiple Chart 2 shows that, year-to-date, the forward multiple has done all the heavy lifting in the SPX and then some, as EPS have actually subtracted from the broad market’s return. In theory, a lower discount rate should boost the multiple and vice versa. Nevertheless, there are good odds that the 10-year Treasury yield has troughed, and BCA’s fixed income strategists continue to expect a selloff in the bond market for the rest of the year. The implication is that equities are becoming fully priced and if profits fail to pick up the baton from the multiple expansion phase, the risk/reward tradeoff is to the downside on a tactical horizon. Meanwhile, there are a number of indicators we track that are still firing warning shots for the overall equity market. Margin debt has stalled and remains 13% below the all-time peak hit last year. Historically, this has been a coincident equity market indicator and a lack of confirmation is troublesome for the overall equity market (bottom panel, Chart 3). Chart 2SPX Return Explained SPX Return Explained SPX Return Explained Chart 3M&A Lull... M&A Lull... M&A Lull... M&A activity has taken a step back, with the total number of deals down 25% from the 2018 zenith (top panel, Chart 3). Similar to margin debt uptake, this is a coincident indicator and the latest weak reading is cause for concern, as it signals that animal spirits are low. With regard to frail sentiment, CEO confidence has taken a beating of late on all fronts. The most recent Business Roundtable and Conference Board CEO surveys reveal that chief executives are a worried bunch. Their views on the overall economic outlook, all industries (including services manufacturing, durable and non-durable), capital outlays, employment, and revenues all remain downbeat, and likely explain the recent M&A lull (Chart 4). On the profit front, last year’s once in a lifetime equity retirement will not repeat this year, warning that artificial EPS growth will weigh on overall profit growth in 2019. Beyond this grim reading on “soft data”, select financial market leading indicators are also not corroborating the euphoric equity market. J.P. Morgan’s EM FX index has petered out recently and both EM and Chinese investable stocks (in U.S. dollar terms) remain well below their early-2018 peaks. Similarly, China-levered U.S. semi equipment stocks are a far cry from their cyclical highs set last year and suggest that some caution is still warranted in the broad equity market (Chart 5). Chart 4...Drop In CEO Confidence... ...Drop In CEO Confidence... ...Drop In CEO Confidence... Chart 5...And Financial Indicators Still Flashing Red ...And Financial Indicators Still Flashing Red ...And Financial Indicators Still Flashing Red Finally, on the profit front, last year’s once in a lifetime equity retirement will not repeat this year, warning that artificial EPS growth will weigh on overall profit growth in 2019. In addition, Charts 6A & 6B show that buybacks are already concentrated in a few sectors. Our sense is that this concentration theme will continue this year and likely center around financials as banks will flex their equity retirement muscle. Chart 6 Chart 6   This week we delve deeper into banks and upgrade a communication services subsector. “A Kind Of Magic” Factors have fallen into place to boost the recently rejigged S&P movies & entertainment index to an above benchmark allocation today. DIS and NFLX dominate this index now comprising roughly 97% of the market cap weight and VIAb is merely the third wheel. The dust has settled from the global media industry M&A frenzy of the past two years, but the push to the cloud via online streaming services suggests that it is only a temporary break. We would not rule out another round of inter- and intra-industry M&A, as content is king once again (Chart 7). Chart 7Rejigged Rejigged Rejigged Recent pricing news of Disney’s streaming service, expected later this year, sent reverberations across the media space as Disney priced it at such a low point in order to grab market share and likely pave the way for future price hikes. While streaming services have been mushrooming, there is space for a number of competitors, signaling that Netflix’s global streaming domination will not come crumbling down all of a sudden. While the index’s 12-month forward EPS took a hit with the NFLX addition in October, 2018 and the forward P/E jumped to the historical mean, this niche communication services subgroup is now clearly a growth index and will continue to command a premium valuation to the broad market (bottom panel, Chart 8). From a macro perspective there are also compelling reasons to warm up to the S&P movies & entertainment index. Consumer confidence remains glued to multi-decade highs and there are high odds that the big gulf that has opened up between confidence and relative share prices will narrow via a rise in the latter (top panel, Chart 8). Moreover, a vibrant labor market with payrolls expanding at a healthy clip (top panel, Chart 9), the unemployment rate and unemployment insurance claims at generational lows, all signal that consumers will keep their purse strings loose, especially given rising wages (third panel, Chart 9). Chart 8Positive Macro... Positive Macro... Positive Macro... Chart 9...Drivers... ...Drivers... ...Drivers... Tack on the confidence consumers have in residential real estate with house prices expanding both on a year-over-year and on a shorter-term basis (second panel, Chart 9), and the ingredients are in place for an increase in consumer recreation outlays. Disney’s streaming pricing disclosure, a favorable macro backdrop on recreation PCE and sell-side analyst extreme profit pessimism argue that more gains are in store for the S&P movies & entertainment index. Lift to overweight today. One final macro variable that is also on the side of the S&P movies & entertainment index is the ISM non-manufacturing index. Historically, real outlays on recreation activities has moved in lockstep with the ISM services survey and the current message is positive for PCE on recreation (bottom panel, Chart 9). More dollars spent on recreation is synonymous with a margin expansion in the S&P movies & entertainment index (third panel, Chart 8). This consumer spending backdrop is also conducive to a rise in relative profitability, the opposite of what the sell-side currently expects (middle panel, Chart 10). Chart 10...But Analysts Are Not Buying It ...But Analysts Are Not Buying It ...But Analysts Are Not Buying It Not only are industry EPS slated to trail the SPX by 300bps in the coming year, but also analysts have been vigorously downgrading their EPS estimates weighing on the sector’s net earnings revisions ratio (bottom panel, Chart 10). This is contrarily positive and we would lean against such analyst pessimism. Netting it all out, Disney’s streaming pricing disclosure, a favorable macro backdrop for recreation PCE and sell-side analyst extreme profit pessimism argue that more gains are in store for the S&P movies & entertainment index. Bottom Line: Lift the S&P movies & entertainment index to overweight today. The ticker symbols for the stocks in this index are: BLBG: S5MOVI – DIS, NFLX, VIAb. Bank Update: Primed For A Re-rating By the end of last week most banks reported profits that exceeded expectations and investors breathed a sigh of relief, despite the early-December yield curve inversion and the more recent broadening of the inversion from the 5/3 all the way out to the 10/fed funds rate slope. What partially explains the sector’s EPS resilience is net interest margins (NIMs) that just entered their fifth straight year of widening. While this may seem counterintuitive given the inverted/flattening yield curve, banks are repressing depositors by not passing on higher interest rates on deposits, thus guaranteeing extremely cheap funding. The bottom panel of Chart 11 shows that the 2-year Treasury yield/1-year CD rate slope is steep and it has historically moved in lockstep with bank NIMs. As a reminder, BCA’s bond strategists expect a selloff in the bond market and remain short duration, signaling that bank NIMs will not suffer a setback for the remainder of the year. Beyond the prospects for a further increase in the price of credit, another key source of bank EPS support is equity retirement. Citi explicitly mentioned it this earnings season, and the S&P financials sector buybacks, largely driven by banks, corroborate this anecdote (Chart 12). Chart 11Deciphering Bank Profit Resilience Deciphering Bank Profit Resilience Deciphering Bank Profit Resilience Chart 12New Buyback Kings New Buyback Kings New Buyback Kings In fact, there is a wide gap between this artificial EPS lift and relative share prices that will likely narrow in the coming months via a catch up phase in the latter, particularly if banks pass the Fed’s stringent stress test anew as we expect later this summer. On the credit quality front, bank NPLs remain anchored near cycle lows and tight labor markets suggest that a flare up in delinquencies is a low probability event in the coming year, especially given BCA’s view of no recession (bottom panel, Chart 13). Chargeoffs and souring loans are almost non-existent in all the categories that the Federal Reserve tracks, with the slight exception of credit card loans that are ticking higher, but from an extremely low base (we provide more details below in the risk section, second & third panels, Chart 13). Finally, loan growth has held up very well despite the stock market collapse in Q4/2018 and the massive tightening in financial conditions. While our overall loans & leases and C&I loan models are decelerating, they remain squarely in expansion mode and should continue to underpin bank profitability (second and bottom panel, Chart 14). Chart 13Pristine Credit Quality Pristine Credit Quality Pristine Credit Quality Chart 14Credit Growth Rests On A Solid Foundation  Credit Growth Rests On A Solid Foundation  Credit Growth Rests On A Solid Foundation  Consumer confidence remains sky-high and house prices are also rising at a healthy pace, signaling that mortgage (top panel, Chart 11) and consumer loan origination will remain upbeat (third panel, Chart 14). The price of credit, credit quality, credit growth along with buybacks all suggest that bank profits will continue to overwhelm. Stay overweight the S&P banks index. All of this positive news is already reflected in banks’ return on equity that vaulted higher recently signaling that a re-rating in still-extremely depressed valuations is looming in the coming quarters (Chart 15). Nevertheless, there are two risks to our sanguine S&P banks view that we are closely monitoring. First, our Economic Impulse Indicator remains near the zero line and, coupled with the still downbeat Citi Economic Surprise Index, warn that demand for loans may start softening at the margin (top panel, Chart 16). Chart 15Follow The ROE Follow The ROE Follow The ROE Chart 16Two Risks To Monitor Two Risks To Monitor Two Risks To Monitor Second, while the top 100 largest commercial banks are not showing a deterioration on the credit card delinquency front, the rest of the banks are waving a red flag as delinquencies are already at recessionary levels. This explains why the overall credit card delinquency rate is ticking higher (bottom panel, Chart 16). Netting it all out, the price of credit, credit quality, credit growth along with buybacks all suggest that bank profits will continue to overwhelm. Bottom Line: Stay overweight the S&P banks index. The ticker symbols for the stocks in this index are: BLBG: S5BANKX – JPM, BAC, WFC, C, USB, PNC, BBT, STI, MTB, FITB, FRC, KEY, CFG, RF, HBAN, SIVB, CMA, ZION, PBCT.   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com   Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps

Valuations Are Too High For Interactive Media And Services Valuations Are Too High For Interactive Media And Services Underweight (High-Conviction) Shares in Facebook, a heavyweight component of the S&P interactive media & services index, have been falling recently as an exodus of executives, including the founders of the Instagram platform, have shaken investor confidence. This adds to our core concern over pending privacy regulation which may further dampen the company’s prospects, as highlighted in our initiation of the index last year.1 Facebook is not alone in facing regulatory struggles as anti-trust legislation against the other index heavyweight Alphabet seems ever more likely to gain traction; at least one presidential contender has made tech break-up part of her election platform. Beyond the headline risks faced by the S&P interactive media & services index, we remain concerned by the growth and valuation prospects. The sector’s forward earnings growth has collapsed to just above the zero line and fallen below the broad market (middle panel). Meanwhile, the slower-growing S&P interactive media & services index trades at an enormous premium to the S&P 500 (bottom panel). Bottom Line: We continue to think a mismatch exists between valuation, growth and regulatory headwinds and reiterate our high-conviction underweight in the S&P interactive media & services index. The ticker symbols in the stocks in this index are: S5INMS – GOOGL, GOOG, FB, TWTR and TRIP. 1       Please see BCA U.S. Equity Strategy Special Report, "Is The Stock Rally Long In The FAANG?," dated August 1, 2018, available at uses.bcaresearch.com.

Highlights Portfolio Strategy As growth becomes scarce, investors flock to sectors that are slated to outgrow the broad market and shy away from the ones that are forecast to trail the SPX’s growth rate. This week we rank sectors and subsectors by EPS growth in our universe of coverage, and identify sweet and trouble spots. Fired up crack spreads, firming refining industry operating metrics, reaccelerating exports along with washed out technicals and compelling valuations, all signal that the time is ripe to buy into refining weakness. The cable industry’s demand headwinds are reflected in depressed relative valuations at a time when industry pricing power is trying to stage a comeback and a drifting lower greenback may also provide positive profit offsets. Stick with a benchmark allocation. Recent Changes Boost the S&P Oil & Gas Refining & Marketing index to overweight all the way from underweight today, locking in relative profits of 21%. Table 1 Awaiting Validation Awaiting Validation Feature Equities broke out last week and surpassed the upper band of their recent trading range, despite economic data releases that continued to surprise to the downside. Two weeks ago, we cautioned investors not to put cash to work as a tactical indigestion period loomed, with the SPX facing stiff resistance near the 2,800 level. In addition, we posited that most of the good news related to the U.S./China trade spat front was reflected in the S&P 500’s V-shaped recovery (top panel, Chart 1). In relative terms, the bottom panel of Chart 1 confirms that the easy money has already been made on the assumption of a positive resolution to the U.S./China trade dispute. Chart 1Trade Deal Priced In Trade Deal Priced In Trade Deal Priced In Going forward, the earnings juggernaut will have to remain in place in order for stocks to vault to fresh all-time highs, likely in the back half of the year. The Trump administration’s massive fiscal stimulus artificially fueled profit growth last year both by lowering the corporate tax rate and by encouraging overseas cash repatriation. The latter boosted share buybacks to an all-time record. Despite 24% EPS growth and $1tn in equity retirement, the SPX ended 2018 6% lower. Why? It became clear that EPS growth was headed lower. In order to gauge trend EPS growth we opt to use EBITDA, a cash flow proxy measure that strips out the direct impact of last year’s fiscal easing. Chart 2 clearly shows that trend growth took a step down following the positive base effects of the GFC-induced collapse and averaged close to 5%/annum from 2012 to 2014. Subsequently, the late-2015/early-2016 manufacturing recession sunk EBITDA into contraction, but the euphoria surrounding the newly elected President pushed trend EBITDA growth to near 10%/annum for two full years in 2017 and 2018. Chart 2Return To 5% Growth? Return To 5% Growth? Return To 5% Growth? Since the late-2018 peak, 12-month forward EBITDA growth continues to drift lower and is now hovering just shy of 3%. Our sense is that 5% organic profit growth is consistent with nominal GDP printing 4%-4.5% at this stage of the business cycle, signaling that a return to the 2012-2014 growth backdrop is likely later in the year. As a reminder, positive profit growth in calendar 2019 remains one of the three pillars underpinning stocks that we have highlighted since the beginning of this year. Stocks have come full circle recovering all of last December’s losses, but in order to make fresh all-time highs, profits will have to deliver. We deem that an earnings validation phase is transpiring and there are early signs that profit growth will trough sometime in the first half of the year. Not only has EBITDA breadth put in a bottom (Chart 2), but also economically hypersensitive indicators suggest that forward EBITDA growth will soon tick higher. Namely, the ISM manufacturing new orders component has perked up on a year-over-year basis. The trough in lumber futures momentum corroborates this message, as does the tick higher in the U.S. boom/bust indicator (Chart 3). Chart 3Growth Green-shoots Growth Green-shoots Growth Green-shoots Given the current macro backdrop and awaiting the profit validation, when growth becomes scarce investors flock to sectors that are outgrowing the broad market and shy away from ones that trail the SPX’s growth rate. Typically, in recessionary times that would equate to investors bidding up defensive sectors that command stable cash flow businesses and avoiding highly cyclical industries. But, BCA does not expect a recession in the coming year. Thus, in order to identify high growth sectors that should outperform during the current soft patch and growth laggards that should underperform, we compiled a table with the GICS1 sectors and all the subsectors we cover. First, we rank the GICS1 sectors and then within each sector we rank the subsectors, both times by absolute 12-month forward EPS growth using I/B/E/S/ data (see second columns, Table 2). We aim to reproduce this table once a quarter. Table 2Identifying S&P 500 Sector EPS Growth Leaders And Laggards Awaiting Validation Awaiting Validation The third columns in Table 2 show the sector growth rate relative to the SPX. The final columns in Table 2 highlight the trend in relative growth. In more detail, they compare the current relative growth rate to that of three months ago: a positive sign indicates an upgrade in analysts’ relative estimates and a negative sign a downgrade in analysts’ relative estimates. Industrials and financials (we are overweight both) are leading the pack outpacing the broad market by 410bps and 350bps, respectively, and enjoy a rising profit trend. On the flip side, energy (overweight) and real estate (underweight) trail the broad market by 490bps and 1480bps, respectively, and showcase a deteriorating EPS trend. With regard to energy, we first identified that analysts are really punishing this sector in the January 22 Weekly Report and the sector’s 2019 EPS contribution was and remains negative.1 Our overweight call will be offside if oil prices suffer a new setback, but our Commodity & Energy strategy service remains bullish on oil, implying relative EPS outperformance in 2019. Year-to-date, energy has bested the SPX by 170bps. This week, we make an energy sector subsurface tweak, and also update a communication services subgroup. Light My Fire Last summer we took refiners down to a below benchmark allocation as all of the good news was perfectly reflected in soaring relative share prices (top panel, Chart 4), at a time when cracks were forming. Now we are compelled to book gains of 21% and boost exposure all the way to overweight. Chart 4Crack Spreads Are On Fire Crack Spreads Are On Fire Crack Spreads Are On Fire Today, refiners paint a near exact opposite picture compared with last July. Relative share prices are no longer rising by 50%/annum. Instead, momentum has collapsed and is now contracting (middle panel, Chart 4). Sell-side analyst exuberance has turned into outright pessimism: refiners’ profits are expected to trail the broad market in the coming year. By comparison, last summer they were penciled in to beat the market by 30 percentage points (bottom panel, Chart 4). Granted M&A activity had also added fuel to the fire, but now all the hot air has come out of the refining industry, and then some. Refiners’ riches move in tandem with crack spreads. When refining margins widen, profits excel and vice versa. Now that refining margins are in a slingshot recovery, refining ills will turn into fortunes (bottom panel, Chart 4). Importantly, wide Brent-WTI spreads underpin crack spreads. Moreover, the crude oil versus refined product inventory backdrop currently reinforces a widening in refining margins. In absolute terms, gasoline stockpiles are being worked off (gasoline inventories shown inverted, bottom panel, Chart 5) and grinding higher demand for refined petroleum products (top panel, Chart 5) will further tighten the industry’s inventory outlook. Chart 5Healthy Supply/Demand Backdrop Healthy Supply/Demand Backdrop Healthy Supply/Demand Backdrop One way domestic refiners are taking advantage of the still wide Brent-WTI differential is via the export markets. Net refined products exports are running at over 3mn barrels/day (bottom panel, Chart 6), and the softening greenback since November will further boost profits with a slight lag as U.S. refining exports will grab an even larger slice of the global pie (U.S. dollar shown inverted and advanced, middle panel, Chart 6). Chart 6U.S. Dollar Softness Is A Boon To Refining Profits U.S. Dollar Softness Is A Boon To Refining Profits U.S. Dollar Softness Is A Boon To Refining Profits On the valuation front, both the relative forward P/E and P/S have undershot their respective historical means and EPS breadth is as bad as it gets, offering investors an excellent entry point in the pure-play oil & gas refining industry (Chart 7). Chart 7Extreme Analyst Pessimism Reigns Extreme Analyst Pessimism Reigns Extreme Analyst Pessimism Reigns In sum, fired up crack spreads, firming refining industry operating metrics, reaccelerating exports along with washed out technicals and compelling valuations, all signal that the time is ripe to buy into refining weakness. Bottom Line: Lift the S&P oil & gas refining & marketing index to overweight all the way from a below benchmark allocation, crystalizing 21% in relative profits since last summer’s inception. The ticker symbols for the stocks in this index are: BLBG: S5OILR – PSX, MPC, VLO, HFC. Cable’s Down But Not Out Cable & satellite stocks had been in an uninterrupted run from the depths of the Great Recession until the peak in relative share prices in August 2017. Since then, cord cutting news and the proliferation of on demand streaming services have wreaked havoc on the industry and cable stocks have trailed the market by over 33% from peak to the most recent trough (top panel, Chart 8). Chart 8Cable Signals Are… Cable Signals Are… Cable Signals Are… This deteriorating demand backdrop more than offset the industry’s reaction function, which has been intra and inter-industry M&A. Now that the M&A dust has settled, what is next in store for the industry? We reckon that leading profit indicators are a mixed bag and we continue to recommend a benchmark allocation in this niche communications services subgroup. The top panel of Chart 8 shows that relative outlays on cable are on a slippery slope, and will continue to weigh heavily on relative share prices for the coming quarters. Nevertheless, the ISM services survey ticked higher recently and is on the cusp of making fresh recovery highs, unlike its sibling the ISM manufacturing survey. This is encouraging news for cable executives and suggests that demand for cable services may not be as moribund as the PCE release is projecting (second panel, Chart 9). Chart 9..A Mixed… ..A Mixed… ..A Mixed… While the cable demand backdrop is unclear, industry pricing power has managed to exit deflation. Cable selling prices have been positive for the better part of the past decade, but starting in late-2017 they collapsed by roughly 600bps relative to overall inflation. True, this deflationary impulse dented profit margins, but currently the industry’s selling prices – and to a much lesser extent profit margins – are in a V-shaped recovery mostly courtesy of base effects (middle & bottom panels, Chart 8). Absent a sustained hook up in cable demand, selling price inflation will prove fleeting and the recent margin expansion phase will also lose steam. Meanwhile, cable stocks and the U.S. dollar enjoy a positive correlation as most of the constituents’ earnings are derived domestically (Chart 10). The recent U.S. dollar softness will, at the margin, weigh on relative profits and thus relative share prices, especially if the Fed stays pat and refrains from raising rates for the rest of the year as the bond market currently expects. Chart 10…Bag …Bag …Bag Finally, earnings breadth continues to fall, but relative valuations are still well below the historical mean (third & bottom panels, Chart 9). Netting it all out, cable’s demand headwinds are well reflected in depressed relative valuations at a time when industry pricing power is trying to stage a comeback and a drifting lower greenback may both provide positive profit offsets. Bottom Line: Remain on the sidelines in the S&P cable & satellite index. The ticker symbols for the stocks in this index are: BLBG: S5CBST – CMCSA, CHTR, DISH.   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com   Footnotes 1      Please see BCA U.S. Equity Strategy Weekly Report, “Dissecting 2019 Earnings” dated January 22, 2019, available at uses.bcaresearch.com. Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps

Risk Reward Still Not There For Interactive Media & Services Risk Reward Still Not There For Interactive Media & Services Underweight (High-Conviction) The S&P interactive media & services index’s heavyweights Alphabet (the parent of Google) and Facebook have now reported their Q4 results and, while both beat estimates (particularly soundly in the case of Facebook), slowing profit growth remains the dominant theme. Both highlighted strong top line efforts for the year to come but equally, both reported costs growing faster than the top line. This is reflected in forward EPS growth estimates (second panel) which have now retreated to the same pace as the broad market. However, sector valuations responded by rising and the gap versus the broad market has started widening (bottom panel). While superior growth should be rewarded with rich valuations, this no longer seems appropriate for this sector. Tack on the ever-present risk of increasing regulation, which we think will be a key sector headwind this year, and a discount seems much more appropriate. Bottom Line: Heady valuations are prone to a downfall and the S&P interactive media & services index has more than its fair share of negative catalysts; stay underweight.   The ticker symbols in the stocks in this index are: S5INMS – GOOGL, GOOG, FB, TWTR and TRIP.

Underweight (High-Conviction) When we lowered our recommendation to underweight and added the S&P interactive media & services index to the high-conviction underweight list for 2019,1 we noted that one of our key themes for the year ahead would be increasing regulatory efforts on technology. This theme has accelerated in recent weeks as Facebook has faced a new government lawsuit and negative headlines with respect to sharing user data, while Alphabet (Google) has been called to testify before Congress. The much harsher environment has filtered through to forward earnings growth that has plummeted to roughly half the level of the broad market (second panel). Still, amidst the recent market turmoil, the S&P interactive media & services index has been an outperformer. This is somewhat surprising, considering the 40% valuation premium the index maintains relative to the broad market (bottom panel). We think it’s only a matter of time until the valuation catches up with earnings to the downside; stay underweight the S&P interactive media & services index. The ticker symbols in the stocks in this index are: S5INMS – GOOGL, GOOG, FB, TWTR and TRIP. 1 Please see BCA U.S. Equity Strategy Weekly Report, “2019 Key Views: High-Conviction Calls,” dated December 3, 2018, available at uses.bcaresearch.com. Regulation Is Coming Regulation Is Coming