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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.

11.01.2024

Qi Stock Spotlight -
Will Q4 earnings season support animal spirits?

Qi’s models suggest a Q4 earnings season that is more likely to penalise misses than reward beats

No surprise that the overwhelming majority of S&P500 Industry Groups would benefit from a macro backdrop of improving growth expectations alongside disinflation. The most exposed from our screen are Autos, Semis, Biotech, Banks, Consumer Services & Software

However, we show that into this season, the average stock is trading rich to its Qi macro-warranted valuation across the majority of these industry groups

Mapping Qi’s fair value gaps (FVG) vs. exposure to the growth / inflation trade-off, Banks, Transportation and Biotech would seem the most vulnerable on an earnings misstep and Software the least

We apply this framework to make distinctions at the stock level - names that have above average exposure to Goldilocks but are most extended on Qi’s FVG – RF, DFS, PSA, TMO, LUV, CMA, C, CFG; names that have above average exposure but cheapest on Qi’s FVG – UBER, PCAR, PTC, AMAT, FFIV, RHI, INTU, ACN

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08.01.2024

Qi Industry Spotlight: Pre-CPI Check-Up

The jury is still out on the path for financial conditions – will the Fed move fast, slow or hold steady? This concern is reflected in high Qi macro sensitivities across risky assets.

Navigating the complex landscape of 2024 demands real-time insights of what is driving the asset universe today and the agility to respond when mispricing emerges. Qi’s suite of real-time macro factor betas, spanning thousands of instruments, provides this clarity.

With the December CPI release this Thursday we do a Qi dive across the S&P500 GICS industry groups. Most industries favor ongoing disinflation with accommodative financial conditions. However, beneath the surface lie nuanced distinctions.

Semiconductors & Banks emerge top in terms of sensitivity to inflation and financial conditions. Biotech, Consumer Services, Real Estate, Capital Goods also feature high on the ranking. At the other end of the spectrum: Staples, Utilities, Energy.

08.01.2024

Qi Stock Spotlight - Unveiling winners & losers in a soft landing scenario

We dissected Qi’s S&P500 models, unveiling the top 30 winners and losers in a soft landing scenario.

Qi’s models rank stocks based on their exposure to growth expectations, HY credit spreads, Fed QT Expectations and USD TWI. A deep dive into the vulnerability of the top 30 winners reveals a 40% outperformance over the past year, contingent on the growth/inflation trade-off improving.

Sector breakdown? Financials and Consumer Discretionary are soft landing enthusiasts, while Consumer Staples and Utilities take a more cautious stance.

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04.01.2024

Qi Market Spotlight - Nothing lasts forever

Qi’s macro sensitivities to GDP Nowcast and high yield credit spreads stand at one year highs.

These sensitivities have accelerated higher through Nov / Dec, leaving Qi’s macro beta impulse at multi-year range highs.

In other words, the resilience of risky assets will be tested if macro factors do not continue to move in their favour.

Our studies suggest a large dislocation between the overbought S&P 500 index and our measure of the macro beta impulse is vulnerable to re-convergence.

02.01.2024

Qi Sector Spotlight - US Financials: The Great Escape?

A core tenet of the proverbial soft landing thesis – where inflation converges back to target without breaking the labour market – is a broadening of the bull market outside of the Technology sector. Indeed, the rapid easing in financial conditions has coincided with the equal-weighted S&P500 outperforming the market-cap weighted index into year-end.

The biggest contributor to that equal-weighted index outperformance is the Financials sector – rallying ~20% from close to 1yr lows at the end of October to 1yr highs in just 2mths. This has been reflected in sharp multiple expansion – the 12mth fwd PE for the XLF ETF now sits closer to 10yr highs than 10yr lows before the rally. Earnings estimate now need to follow suit. See the charts below.

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12.12.2023

Navigating Market Hopes vs. Fears into 2024

The SPX Macro Beta Impulse indicates whether Qi’s macro factor sensitivities to the S&P 500 - e.g. credit spreads, commodities, interest rates etc - are rising or falling, i.e. the beta.

We look at a 4wk rolling period to gauge the prevailing market mindset. See the original "The Qi Macro Beta Impulse for the S&P500" on 7th November.

The Qi macro factor information set spans a variety of datapoints but they can be broadly categorised under growth expectations, financial conditions or risk appetite.

By looking under the hood at the drivers of the macro beta, we are able to better gauge what is driving the market regime.
2022 was about rising inflation and the impact on financial conditions. The S&P 500 had an inverse relationship to its beta to financial conditions. During an inflationary period the fear of the policy response is all that matters for risk-off as oppose to growth fears. See the chart below.

05.12.2023

Quant Insight's Macro 2024 Outlook

A selection of just some of the charts and observations from our LinkedIn live event looking back at 2023 and the outlook for 2024.

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05.12.2023

Finessing the second wave
of the AI revolution

Nvidia is the poster child of the AI trade but despite a 200% plus gain in 2023, it appears to have lost some momentum. In contrast, software names have had a strong run - the sector has rallied almost 20% since the October lows.

There is a narrative that the AI revolution is evolving. The early winners (chip makers) are giving way to a new set of beneficiaries - the software companies that will help develop the necessary infrastructure.

On Qi, IGV (the iShares ETF tracking Expanded Tech Software) is in regime with a strong valuation story. Outright, versus semiconductors (SOXX) and versus the broader market (SPY) it screens as rich versus prevailing macro conditions.

Even if you believe in a rotation in the AI winners, these do not look the optimal levels to be chasing software.

29.11.2023

US equity rally - it's not liquidity

Seasonals, positioning, FOMO, soft landing hopes. There are several narratives being used to explain the recent US equity rally.

This week the FT's excellent Unhedged posited a new explanation - improving liquidity conditions have helped the market higher.

Qi has a custom model for the S&P500 that includes one additional variable - a Fed liquidity factor. The descriptors we use to build our Fed liquidity factor are the same as the measure the FT cites.

This enables us to measure the independent impact of Fed liquidity on SPX. Short answer - liquidity has helped but the impact is marginal.

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07.11.2023

The Qi Macro Beta Impulse for the S&P500

Introducing Qi's Macro Beta Impulse – now equity portfolio managers and risk managers have a timely, easily identifiable metric informing them when macro risks on their books are rising or falling.

Mr. Market swings between fearful and euphoric as macro regimes evolve. Now, our unique macro factor approach quantifies how Mr. Market responds.

Assess macro volatility on your book, asset, or any index with a single measure measuring the impact of macro volatility on any asset’s volatility.

08.01.2024

Qi Industry Spotlight: Pre-CPI Check-Up

These conclusions are consistent with our recent screen of stock winners & losers in a soft landing scenario, where we screened sensitivities to growth expectations rather than inflation expectations.

The backbone is Qi’s macro factor sensitivity data across all S&P 500 stocks. From this data, we ran the following screen:

Removed stocks where Qi’s model RSq was less than 65%, ensuring a high degree of macro explanatory power
Ranked the remaining ~350 stocks by their total exposure to US inflation expectations and their exposure to HY credit spreads, Fed QT expectations and USD TWI (proxy for financial conditions)
Aggregated these stocks by industry group, revealing the average sensitivity to these macro drivers

The result is the scatterplot above (click on chart above for a larger image).

The arrow highlights that the direction of travel for beneficiaries of disinflation and easier financial conditions is from the bottom-right to top-left. Specifically, Semiconductors are the most sensitive to inflation expectations and Banks to financial conditions.

Below is an alternative representation ranking the industries by their total exposure to these two drivers.

Leveraging the granularity of Qi’s data, we have the ability to also pinpoint exposures to the stock level in addition to any mispricing given the prevailing macro backdrop.

For an in-depth exploration of our screening process, from sectors to industries to individual stock analyses, feel free to reach out to the Qi team.

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04.01.2024

Qi Market Spotlight - Nothing lasts forever

The S&P500’s Qi factor sensitivity to growth (GDP Nowcast, copper) and financial conditions (Fed QT expectations, HY credit spreads) to SPX stands at 1yr highs. Equities are increasingly reliant on what we saw late last year to continue. This picture is similar for other major indices. The Nasdaq 100 sensitivity to HY credit spreads and economic growth is also both at 1yrs highs – the two biggest drivers of the index.

The Qi S&P500 macro beta impulse is defined as the sum of the 4wk change in absolute sensitivities across all our macro factors, based on ST models. We plot that against the percentage deviation of the S&P500 from its 50d MA and invert that axis. See the chart below.

The premise is simple - as the gradient of macro factor sensitivities accelerates, the beta of the market to macro factors is rising. That is fine when the macro backdrop is moving in your favour but ordinarily Mr. Market struggles to digest the macro gyrations.

Note the dislocation that occurred over the most recent 8wk rally – the improving growth / inflation trade-off supported by the Fed “pivot” saw macro drivers move in favour of Qi’s models. The Beta Impulse rose but this time around S&P500 model price momentum was rising alongside this.

This backdrop creates vulnerability as the impulse rises ever further. Over the last few years, there appears to be a natural limit beyond which the beta impulse has peaked (ex-Covid). This is marked by the red line. Periods where have seen such as dislocation between price action and the beta impulse tend to re-converge, marked in the chart

Consider the Qi short term model of the S&P 500 – 93% model explanatory power and the model price starting to show signs of fatigue. We view model price as offering a true / less noisy representation of the market value than the spot price. Has the improvement in the growth / inflation trade-off already been priced?

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12.12.2023

Navigating Market Hopes vs. Fears into 2024

In contrast, 2023 was about the improving growth / inflation trade-off aka Goldilocks, in the face of the naysayers calling for a hard landing after the fastest Fed tightening we had see in recent years.

During a disinflationary period, the fear of a late business cycle and the lagged impacts of policy is what matters for risk-off more than financial conditions. The S&P 500 in 2023 has an inverse relationship to its beta to growth relative to financial conditions. See the second chart below.

This should not surprise. If the economic backdrop was benign, investors will not be worried about growth i.e. sensitivities will remain relatively muted. When growth fears rise, the beta to growth will rise relative to other factors.

Today, under the hood, since early December the beta to growth has started to rise relative to financial conditions – how much tighter do we really expect credit spreads to get from here? In other words, the second chart suggests equities look rich relative to the growth / inflation trade-off – a similar level of confidence was also seen in late July. The bar is set high. Thus we would argue the market is trading on hope rather than fear into 2024.

Next year, the outlook is more poised on a knife-edge in our view. Street strategists simply extrapolate the last 3mth price action into their annual outlooks. The length of the runway for stocks will be dictated again by the growth / inflation trade-off and Qi offers the tools to expose this.

05.12.2023

Finessing the second wave
of the AI revolution

Qi's model for IGV has 79% confidence. This latest regime started at the beginning of May and confidence has been pretty stable since then.

On current patterns, the Software sector is dominated by a desire for reflation, rate volatility to remain contained and credit spreads to tighten. Software loves Goldilocks.

The Fair Value Gap is +1.1 standard deviations which currently translates into IGV standing 7.8% rich to overall macro conditions. In short, and from a pure macro perspective, a fair amount of good news is in the price.

The chart above shows IGV relative to semiconductors. The white line is the spot price of the IGV/SOXX ratio; the red line is Qi's macro-warranted model value for the pair.

Once again IGV wants reflation. Higher inflation expectations are consistent with Software outperforming Semis. The recent fall in inflation expectations are the biggest reason for the 3% fall in Qi model value over the last month.

That decline in model fair value stands in sharp contrast to the recent spate of IGV outperformance. Hence a 8.7% rich valuation on Qi.

And finally we show Software versus the broader market by modelling the IGV/SPY ratio.

The desire for reflation is there again but this time other factors have worked to offset the drag from falling inflation expectations. The net result is macro momentum has eeked out a 0.9% gain on the month.

And once again, the recent rally in IGV has outstripped where aggregate macro conditions say it 'should' trade. Software screens as 6.5% rich relative to the S&P500 on Qi.

This is not to dispute the idea that the second wave of the AI revolution could provide a huge benefit to software stocks. The AI theme is not going away in 2024.

It is a warning that, should the mood of the market turn down, then IGV looks vulnerable from a tactical perspective. More specifically any scenario that speaks to sticky inflation, rising bond vol and wider credit spreads poses a risk.

Even bottom-up or thematic investors should know that, with Payrolls on Friday and the Fed meeting next Wednesday, the macro angle needs to be factored in.

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07.11.2023

The Qi Macro Beta Impulse for the S&P500

Qi identifies the sensitivities of a security to a broad set of macro factors. This macro factor information set spans real-time indicators of growth, risk appetite and financial conditions.
These sensitivities inform us of the most important macro influences on the security, point-in-time. However, by capturing this information daily, we can also determine how these sensitivities are changing over time i.e. as factor sensitivities rise, the volatility of the security is being increasingly dictated by the volatility of the macro factors. In other words, we can say that the beta of the security to macro factors has risen. We refer to this beta as the “Qi macro beta impulse” – a single measure of how macro factor sensitivities for the security in question are changing.
Conceptually, what does the Qi macro beta impulse tell us? Mr. Market is a neurotic patient that would prefer a backdrop of macro factor stability / low beta to macro over a backdrop of increasing macro factor volatility / high beta to macro. By way of example, equities want tighter credit spreads, but if the sensitivity to credit spreads is increasing as opposed to stable, market attention is clearly more focused on the health of the credit cycle. Therefore, the simple hypothesis is that Mr. Market is more likely to come under pressure when the macro beta impulse is rising.
We have considered in this note the Qi macro beta impulse for the S&P 500. Specifically, the impulse is calculated weekly - definAed as the sum of the 4wk change in the absolute sensitivities to all our macro factors. This time series represents S&P500’s macro beta impulse. Given the dynamism of this indicator, we use Qi’s short term models to capture regime shifts in a world where investor observation mindsets have become shorter and shorter. We compare this to the S&P 500, specifically the deviations of the index from its 50d MA.

The first chart suggests there is merit in our initial hypothesis. As the gradient of macro factor sensitivities accelerates, the beta of the market to macro factors is rising and Mr. Market struggles to digest the macro gyrations, with the index more likely to be below its 50d MA.
We acknowledge that there can be periods where despite a high macro factor beta, the index makes headway because those macro factors are moving in a favourable direction. Earlier this year, the macro beta impulse rose, but US data was strong alongside AI dominance.
The data shown is from Jan2018. By late October, the market was clearly oversold relative to the macro beta impulse – the aggregate change in macro factor sensitivities over the prior 4wks was close to zero – indicating a market progressively coming to greater ease with macro.
On this basis the market was oversold in Oct22, Jun22, Mar 20 relative to the macro beta impulse. The market was overbought in Jul23, Q1 22, Nov21. Essentially, these are periods of over / under exuberance in risky assets relative to how their underlying sensitivity to macro factors is changing.
In the bottom chart we show the beta impulse by the broad 3 macro factor buckets – financial conditions, growth, risk appetite. There is, unsurprisingly, a high degree of correlation as macro factors do not tend to move in isolation with each other.
Going forward this indicator will be available weekly in our Monday Macro Hub publication.

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