Hey There Income Hunter,

We know Goldman Sachs is the Federal Reserve’s No. 1 pawn.

The Fed, you’ll recall, used them early and often as a third-party hawkish voice.

So, the question is why is Goldman coming out with messaging about slashing earnings now?

One reason is that the Fed realizes it can’t get inflation anywhere near its target. So, the US central bank may need to break something in the economy in order to get the cover to pivot back to quantitative easing.

Yesterday, the European Central Bank announced it will add a special case of QE the day its original QE ends … 

The Fed can’t be far behind. J-Pow and co. may just need to force a final crash in the market to have the cover to “come to the rescue.”

Today, we’ll look at where a capitulation trade may take us before the Fed steps in.

Fair Value of Earnings and PE

Price-to-earnings ratio (PE) is the most widely used indication of how many years of profits at the current rate it will take to recoup an investment in a stock. 

Today the S&P 500 PE stands at 29 but the historical average covering 50-years is a PE of 20.

In a recession the PE can be close to 12, so I’m being conservative in an estimate of where the S&P 500 index (SPX) can go to get to fair value. 

Notice the chart below showing SPX trading down to 2600 just to reach the historical average on both PE and earnings. 

Did Goldman Trigger the Capitulation Trade?

Smart money knew how far off the earnings estimates were. However, the Fed was pounding the table about how strong the economy was. 

That may be about to change. Based on the forward looking numbers, including consumer and manufacturing surveys I think the earnings will be at least as bad as Q1. The next downturn may force the Fed to follow in the ECB’s footsteps and switch back to an easing policy way before the tightening is complete.

Bring It Home

I have a trade that I believe will be ideal in the short term and will absolutely crush it once the Fed flips back to easing.

The combination of disappointing earnings and high inflation (stagflation) will put a lot of pressure on corporate bond ratings. 

Bearish option strategies on corporate bond ETFs will be a big winner.

Meanwhile, weaker earnings decrease tax receipts that are needed to pay the interest on massive government debt …

So, the Fed will be forced to support the Treasury bond market, which will fuel a rally in Treasury bond ETFs.

I have an awesome paired trade that can work today and explode upon the Fed’s pivot back to easing. 

If you’re interested in gaining access to this and other macro trades to take advantage of powerful market trends we’ll see in the months ahead, call 1-888-872-3301 starting at 9 a.m. ET today and speak to the Option Pit Customer Care team about subscribing to my Power Income Trader program.

Until then …

Live and Trade With Passion My Friend,

Griff