Wall Street Has No Clue How to Price In the Banking Upheaval

As things stand now, net equity exposure at hedge funds has remained low in the 19th percentile of a one-year range, cash holdings at mutual funds have risen for 15 straight months, and so-called commodity trading advisers have gone from being long around $130 billion of futures to being short around $28 billion, the firm’s data show.

“It’s felt like most investor cohorts have had a rough couple of weeks,” Bobby Molavi, a managing director at Goldman, wrote in a note. “There remains a lack of conviction almost everywhere but at least positioning matches sentiment for the arguably the first time this year.”

To be sure, sitting still has been profitable of late.

The S&P 500 is coming off a second straight week of gains, almost erasing its entire loss from March 8, the day before the plunge in regional banks. While Treasuries have dealt body blows to short sellers, holding on through the worst volatility in four decades would’ve produced sizable profits.

For now, traders are unwilling to push the market in any direction. Early Tuesday, the S&P 500 was trapped in a 0.7% band, the narrowest intraday range since November. (It was up 1.08% at 4,014. at 2:35 p.m. ET.)

With so much hanging in the balance, conflicting narratives abound. While the banking crisis could lead to tighter lending standards that hurt the economy, the specter of a recession means the Federal Reserve may be close to done with its aggressive inflation-fighting campaign.

Analysts following individual stocks have barely changed their outlooks on corporate earnings. Their aggregate 2023 forecast for the S&P 500’s members has stood near $220 a share from the week before the failure of lenders including Silicon Valley Bank.

With first-quarter earnings set to start in about two weeks, it’s possible that many of them are waiting for guidance from company management before adjusting their numbers.

“The U.S. economy and labor markets have been remarkably resilient over the last nine months, and markets have extrapolated this to mean corporate earnings can remain strong as well,” said Nicholas Colas, co-founder of DataTrek Research. “Q1 earnings reports and management guidance, which we will get in the first half of Q2, will test that theory.”