The crash in oil prices might be all about the dollar.

In a note to clients on Monday, Tobias Levkovich at Citi asked a simple question: What if the collapse in oil prices is all about the dollar?

Levkovich notes — as others have before— that the price of West Texas Intermediate crude and the value of the US dollar are inversely correlated, meaning one drops as the other rises.

We've seen a huge rally in the dollar over the past 18 months, while the price of crude has collapsed.

Recently, we've heard that a lack of demand, a glut of supply, and the collapse in commodity prices signal terrible things about the future of the world economy. But if you're looking for a root cause behind the drop in oil prices, you should perhaps look no further than your wallet.

"While investors have been fixated on the demand dynamics of emerging markets bumping against excess supply derived from super cycle expansion programs, it seems as if the greenback can explain much of the movement," Levkovich writes.

Levkovich adds (emphasis ours): "Investors have been focused on the US dollar but have tried to decipher something more elaborate for agricultural, mineral and crude products ... Nonetheless, investors may just need to look at just one factor rather than a plethora of inputs."

Just an idea.

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• Business Insider recently spoke with Tobias Levkovich, Citigroup's chief US equity strategist, about what's keeping investors complacent.
• Levkovich explained why earnings may not produce the same stock market gains witnessed last year and outlined what he considers the most underappreciated story in markets right now.

After a volatile first quarter, some investors were counting on earnings season to be the salve for the stock market this year.

That isn't likely to be the case, according to Tobias Levkovich, Citigroup's chief US equity strategist. In his view, strong earnings growth is one of two things keeping investors complacent.

Levkovich recently spoke to Business Insider about why this is the case, what sectors could contribute to the market's growth this year, and the folly behind looking for a straightforward market catalyst.

This interview has been edited for length and clarity.

Akin Oyedele: The big story in markets lately is the 10-year yield hitting 3%, so I wanted to get your take on that and what it means for stocks.

Tobias Levkovich: Let me set the stage a little bit.

We started the year with the idea that it will be one of consolidation and rotation.

By consolidation, we meant that you would get very strong earnings growth, but you wouldn't see the full benefit of that in the price of stocks. In other words, you'd see multiple compression.

So if we believe earnings will be up 14-15%, you might only get 5% in equity-market appreciation and lose 10 points on the multiple. I don't mean the P/E goes from 20 to 10 points — I mean you'd lose some of that appreciation.

The move in the market in 2016 and half the move in 2017 was multiple-related, kind of anticipating a more pro-business, pro-growth agenda. And as you got it, you were earning your way into it — you already paid for it, and you're not going to get paid a second time.

We also expected some inflation and some higher bond yields.

So again, this idea of consolidation was more about looking at history, trying to understand how markets trade, and the sense that there's probably more wage inflation than people perceive.

No. 2, we talked about rotation. In an environment where bond yields are climbing, you typically see value beat growth. That doesn't mean week-to-week or in the earnings numbers, and I kind of almost don't respond to those day-to-day moves. I find them noise, not signal.

We like financials. We like energy. We like more cyclical components of the economy. We've been underweight staples. Year to date, as of last night [Wednesday], energy's outperformed tech. That's not on most people's minds. We downgraded diversified financials about a week and a half ago from an overweight. We're still overweight banks and insurance. Some of the banks came through with some numbers that the Street clearly didn't love.

So let's talk just a moment about earnings in general.

Very few companies are going to stick their necks out and say everything's fine.

Earnings have been far better than people thought, yet stock prices haven't necessarily reacted to them. We recently wrote a piece saying that earnings would not heal the troubles in the market. People were hoping that it would occur that way, and we said we didn't expect it to.

Most people want to get some sense of outlook into the latter part of this year and into whether 2019 is OK; there has been a lot of concern about end-of-cycle issues. So what I'd love to get from company A, B, or C is some feeling that I'm OK for earnings into the latter part of this year and maybe even into 2019.

It's April. Managements don't know that in April. You're asking them to make a call for what December or next April looks like. They just don't have that visibility. So what you're kind of really asking from the companies is not did you have a good first quarter, but how do the third and fourth quarter look?

Companies have visibility a quarter out — maybe if you're lucky, two quarters out, but you certainly don't have nine or 12 months out. And very few companies are going to stick their necks out and say everything's fine and "We think we can up the numbers for the year" when there's potential for them to disappoint. If that was the visibility that people wanted, they weren't going to get it in April.

Earnings have been far better than people thought, yet stock prices haven't necessarily reacted to them.

Two things are keeping people complacent. One is that earnings are really good. Markets don't generally blow up if earnings are good.

Two is there a Fed put out there at what strike price? Thus far, it's not down 5, 10%, because the Fed hasn't indicated that and we've already had that kind of correction. But is it 15%? Is it 20%? And there's the sense that there's a potential feedback loop in that if markets go down enough, management teams and companies would be worried that there's some kind of discomforting, sinister signal from the market, and as a result, the Fed will have to stop being aggressive.

I think those are the two things kind of keeping people complacent. There isn't really fear out there. You almost need fear, and you need some time, to prove that the concerns around the end of the cycle are overdone.

Oyedele: Your year-end S&P 500 target is 2,800. How do we get there from here?

Levkovich: If earnings are up 14% or 15% and we lost a little multiple, getting up 5% is not asking for the moon.

We have eight to 10 different ways we target our S&P approach. We look to a variety of factors and see where most of them congregate. We don't use the signal factor.

I was talking to someone earlier today, and said I'm getting clients asking to report on my recent trip to Asia, and one of the questions is what's the catalyst to make the market go up — that kind of magic-bullet question. And this guy was telling me, "I hate that question." And I said that's not the question I hate. It's a reasonable question.

This idea of a nice, simple 'if A occurs, B follows' is not the market.

Here's the question I hate: What multiple should the market trade at? My answer to that typically is: Who died and made me king that you have to follow what I say? I can have a view on what the market should trade at, but that doesn't mean investors will trade it that way. So what I need to do is look at how markets trade price-to-book against inflation, how markets trade on historical P/Es, what have been the market outcomes.

I don't for a moment assume — and my ego just isn't big enough to assume — that everyone's going to listen to me because I think the multiple should be X. Honestly, who the hell cares what my viewpoint is on that? I'm honest about this. I don't have enough money to force the outcome. Mr. Bezos doesn't have enough money to force the outcome. It's a $26 trillion market. Why would you think that your opinion matters?

You get my point. To me, these are foolish questions because they don't really matter.

Oyedele: So what are the right questions to be asking?

Levkovich: I think you have to look at a variety of things, and that's the problem — everybody likes a simple answer.

Here's the example I often give to people: If you eat a lot of food, you're going to gain weight. That sounds like a very reasonable cause and effect.

Now let me give you three things that say that's not true: If you ate a lot of vegetables and fruit, you probably aren't going to gain weight; No. 2, if you work out like crazy, you're probably not going to gain weight; and No. 3, people who I've learned to really hate, people who have very fortunate, fast metabolism, aren't going to gain weight.

So the starting statement was kind of true — except that I gave you three examples that shoot it down in a second.

So this idea of a nice, simple "if A occurs, B follows" is not the market. The market has multiple influences, and you have to think about if there are 10 different things that affect it, where's the body of evidence leaning? Which is, by the way, how our Panic/Euphoria Model works. There are nine factors in the model. They sometimes conflict, and that's OK, because that's the real world.

The comfort level that people have in wage growth ... in the 2.6-2.7% range is probably very inaccurate.

We're all pretty good at preselecting information that backs up our fears. It's really bad when you're telling clients "I have a piece of evidence that supports me, and I'll ignore the other ones that don't." That's not helping people.

Oyedele: What's an example of a viewpoint out there that you think is accurate but perhaps unpalatable for investors to hear right now? Another way of phrasing that is: Is there anything on your radar that you think the market's underappreciating?

Levkovich: I think people have been underappreciating what's been going on in the labor force. We've been hearing from companies for a while about how tight it is to get good workers.

It started off, let's say, in the homebuilders last year. Another example is the trucking industry. But we're hearing it from industrial companies, we're hearing it from energy companies — it's becoming much more widespread. And that's why the comfort level that people have in wage growth of February and March in the 2.6-2.7% range is probably very inaccurate.

When you look at the gap between U6 and U3 unemployment rates, it tends to be a really good measure for what happens to wage inflation. And it is likely that gap is going to shrink based on some outlooks we've done in the course of the next six to nine months. That's going to put even more upward pressure on wage inflation.

Companies are going to try and raise prices. Not every company will be able to, but most will. And they're going to pass them onto you and me as consumers, and that will push some of the inflation data higher, with some bond-yield reaction to it.

Rising inflation expectations over the last 20 years meant buy cyclicals, not defensives. So if the market is going to do what it's done for the past 20 years, then it's probably going to do it again, unless you go thinking this time is different. It's a lot sexier to say this time it's different. But every time you hear those great paradigms of change, they almost rarely play out. We all like new and exciting things, but are they really sustainable?

And I won't even discuss bitcoin.

Somebody brought this up to me earlier today, which was: It's interesting that the stuff you would have thought you were essentially safe in, like staples, you've just been crushed. It's one thing to underperform. It's another thing for some of these stocks to be down 10-20% since the beginning of the year.

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• Tobias Levkovich, Citigroup's chief US equity strategist, is among several strategists on Wall Street sounding a cautious tone on technology stocks. 
• Last year, big tech gave the stock market its largest gains. 

The chorus of strategists calling for caution on tech stocks keeps getting louder. 

Tobias Levkovich, Citigroup's chief US equity strategist, is among those who say the sector is unlikely to repeat its role in 2017 as the stock market's leader. Strategists at Bank of America Merrill Lynch, Goldman Sachs, and Morgan Stanley have also sounded a cautious tone on big tech.  

"We're not telling you these stocks are going to crater," Citi's Levkovich told Business Insider in a recent interview. "We are saying they could underperform, which is a very different story."

Some of the big tech news of the year that has added to investors' caution has come from the so-called FAANGs that propelled the market last year; the Nasdaq 100 surged 21% last year. As Facebook continued to deal with election interference, the harvesting of its users' data by a quiz app and Cambridge Analytica was blown into the public's view. President Donald Trump went after Amazon for crushing smaller retailers. Analysts were worried about sluggish iPhone X demand. 

Coupled with Levkovich's list of reasons why tech could underperform is a slew of longer-term trends, or what he called "demand functions," that are driving the sector: mobility, the cloud, cybersecurity, automation, virtualization, and artificial intelligence.

However, an investor who's counting on tech stocks to beat the market would be disappointed, if his call turns out to be prescient. 

"You need new buyers to come in and you need to give them catalysts to buy," Levkovich said. "Right now, I can give you a couple of reasons why they might not want to buy." 

Here are six of his reasons why: 

1. Higher bond yields mean the present value of future earnings or cash-flow streams are hurt. Secular growers tend to have an issue when you have higher bond yields.
2. If the economy is somewhat better — and that's why bond yields are going higher — then investors have other options to get growth at lower prices. They can buy cyclical alternatives to tech that can grow rapidly at a lower PE.
3. There are concerns about more regulation, which would bring higher costs.
4. The European Union is considering new taxes for large tech companies.
5. Projected earnings-growth rates indicate a slowdown in the second half of the year for tech — an industry that tends to be driven by growth and momentum. 
6. Many stocks, in the software and services industry for example, are not undervalued, and Citi's valuation metrics that have been the most predictive of stock price performance are suggesting these stocks can underperform.

"But what about strong earnings?" is a reasonable retort to Levkovich's view.

However, even beyond tech, he's not counting on first-quarter results to be the medicine that heals the market after a volatile start to 2018.

Heading into 2018, Citi's view on equities was that it would be a year of consolidation, among other things, after the prospects of tax reform and fiscal stimulus jolted the market in 2017, sending several measures of equity valuations including the price-to-earnings multiple to eyebrow-raising levels, .    

"The move in the market in 2016 and half the move in 2017 was multiple-related, kind of anticipating a more pro-business, pro-growth agenda," Levkovich said. "And as you got it, you were earning your way into it — you already paid for it, and you're not going to get paid a second time." 

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Citi's Tobias Levkovich has raised his year-end target for the S&P 500 to 2,000, from his earlier target of 1,975.

"Large cap US equities are approaching year-end targets more rapidly than had been anticipated, supported by respectable earnings," wrote Levkovich. "With the S&P 500 up 4.4% year-to-date and our late 2013 expectation for a 2014 full-year gain of about 7.0%, it seems appropriate to reconsider the market outlook especially in the face of better-than-expected profits."

The S&P is at around 1,935 right now.

Here's Levkovich's expectations for S&P 500 earnings:

• 2014 EPS: $118.20 (up from $117.75)
• 2015 EPS: $126.70 (up from $126.00)

He sees the index rallying to the "2,040-2,060 range (or a single point figure of 2,050)" twelve months from now.

"The bigger challenges facing investors in 2015 might involve a significant change from the Fed and Chinese economic trends," he said. "It is reasonable to wonder about a forthcoming tightening in monetary policy once tapering is done with and the focus shifts to rate hikes. The timing and intensity of such moves will be somewhat dependent on inflation pressures and there is also concern about the impact of any rate hikes on emerging economies."

Levkovich does not expect this to be a smooth ride up. According to the Panic/Euphoria model, Citi's proprietary measure of market sentiment, there's an 80% chance the market will be down during this period.

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With stock prices surging in the biotech and internet sectors, some worrywarts can't help but freak out about the possibility that we're reliving the bubble of the dotcom era.

It certainly didn't help when Federal Reserve Chair Janet Yellen warned that valuation metrics in these sectors "appear substantially stretched."

Butmostmeasuresshowthat the broad markets and industries are nowhere near the ear-popping levels of the Technology, Media and Telecom (TMT) bubble of 2000.

In a 13-page note titled "Blowing and Bursting Bubbles," Citi's Tobias Levkovich offers a good discussion of past bubble cycles.

But one chart from his August 1 offered some eyeopening perspective. Here's his comment for context:

In the late 1990s, the TMT bubble expanded, with the combination of the IT sector along with Media stocks and the Telecommunications Services sector culminating with a near 40% composition of the S&P 500 market cap entering 2000. Valuations were through the roof within Nasdaq relative to the S&P 500 (see Figure 1) indeed, the Nasdaq 100 was trading at more than 100x forward EPS in late 1999. The notions of a New Economy unburdened by typical economic cycles became the rage and risk premiums collapsed to near nothing.

That was then.

Today, valuations in the Nasdaq are nowhere near those literally off-the-chart levels.

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Stock prices relative to earnings are very expensive. This is reflected by the high price-earnings (PE) ratio.

One closely-followed version of the PE ratio is Robert Shiller's cyclically-adjusted price-earnings (CAPE) ratio, which is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings.  If the ratio is above the long-term average of around 16x, the stock market is considered expensive.

CAPE is currently at 26x, a level last seen during the dotcom bubble and, before that, the crash of 1929.

Therefore, we must be doomed, right? Not necessarily.

"The so-called CAPE, popularized by Professor Shiller of Yale is extended but unfortunately has no ability to predict stock price outcomes a year later," Citi's Tobias Levkovich said on Friday. "Yet, that does not seem to confound the bears, which we find both intriguing and revealing about motive rather than study."

To illustrate his point, Levkovich reviewed the 12-month return of the S&P 500 after the index hit various CAPE levels in history. (See chart)

Intuitively, you'd think that a high CAPE would be followed by low or negative returns, while a low CAPE would be followed by higher positive returns. This would manifest as blue dots going from the top left to the bottom right.

By eyeballing it, it's obvious the trend is not clear.Levkovich tested the relationship between CAPE and 12-month returns using R², which reveals how well a regression line — the line of best fit you see — explains the relationship.

The R2 was a very low 0.06, indicating that there is essentially no statistically sound relationship. In other words, Robert Shiller's revered stock market valuation ratio is crappy at predicting 12-month returns.

The thing is, Robert Shiller is aware that CAPE does a terrible job of telling traders when to buy and sell stocks. He explained to Business Insider's Henry Blodget two years ago.

John Campbell, who’s now a professor at Harvard, and I presented our findings first to the Federal Reserve Board in 1996, and we had a regression, showing how the P/E ratio predicts returns. And we had scatter diagrams, showing 10-year subsequent returns against the CAPE, what we call the cyclically adjusted price earnings ratio. And that had a pretty good fit. So I think the bottom line that we were giving – and maybe we didn’t stress or emphasize it enough – was that it’s continual. It’s not a timing mechanism, it doesn’t tell you – and I had the same mistake in my mind, to some extent — wait until it goes all the way down to a P/E of 7, or something.

In other words, don't dump stocks and hide in cash because the CAPE is at 26. Rather, just be prepared lower average returns for years to come.

Ultimately, a PE ratio is just not a good tool for predicting 12-month returns. Having said, it's probably best not to play the game of predicting 12-month returns.

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"Over the past 10 years, S&P 500 constituents have bought back nearly $4 trillion of stock while investors have added cumulative inflows of less than $100 billion to US equities via mutual funds and exchange traded funds," Citi's Tobias Levkovich said in a note to clients today.

This is not news. But it continues to be a jarring reminder of how stock market mania hasn't permeated Main Street America. Mom and pop just don't care.

"The lack of US retail investor interest in stocks has been stunning and equity market tops usually consist of overly aggressive individual investor interest in the asset class," Levkovich continued. "In this context, it is challenging to suggest that the S&P 500 is due a major correction barring exogenous shocks."

Levkovich has a year-end S&P 500 target of 2,200.

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The stock market is at an all-time high, and milestones like this make investors hungry for guidance.

On Friday, Citi's Tobias Levkovich introduced a new 12-month target for the S&P 500.

"Improving hiring intentions, wage lead indicators, the impact of oil price declines, some reflation abroad and still supportive credit conditions all suggest that equity markets should climb further in 1H16," he wrote. "The pace of monetary policy 'normalization' will need to be monitored, yet a mid-2016 S&P 500 target of 2,300 looks reasonable, though any new interest in US stocks by the general public or global investors who prefer QE-driven indices, could lead to even higher US stock levels."

That's an 8% gain from current levels, which seems pretty bullish considering the fact that the S&P 500 is up 220% from the March 2009 low.

But what about the elevated price-earnings multiple, which the market bears frequently point to?

Levkovich thinks that you can't just bank on one measure alone.

"[T]he more critical issue might be that the proof point cannot be a single chart but rather a series of data that generates a preponderance of evidence rather than an opinion built on a single data point," he said, noting that his target is based on ten inputs including consumer confidence, the VIX, earnings growth, as well as the price-earnings ratio.

But what about the prospect of tighter monetary policy via rate hikes from the Federal Reserve?

"[S]uggesting that the Fed’s first rate hike will spell doomsday for equities certainly makes for attention-grabbing headlines but the history of S&P 500 reactions over the past 60 years yields a far different and more positive stock price outcome," he noted.

Indeed, history shows that stock prices tend to rise during the months leading into and months following an initial rate hike.

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The number of Baby Boomers' children will be greater than the number of boomers themselves, which Citi's Tobias Levkovich sees as a bullish trend for stocks.

His basic argument is that as these Baby Boomers' kids enter the 35-39 age range — aka the age when people have bought their first home, have a few kids — they'll start saving aggressively in the stock market.

"The Baby Boom generation powered the 1980s and the 1990s bull market run — Generations X and Y could drive the current decades upside opportunity," according to Levkovich.

In his 17-page note to clients, Levkovich made a comprehensive, multi-faceted case for why demographic trends were favorable for stocks.

"Some estimates suggest that more than $40 trillion of wealth will be transferred by 2060 from aging Americans to their offspring and grandchildren, with the potential for continued consumption at a more impressive pace than is generally expected," he added. "Despite the two major equity bear markets of the past 15 years, equities still offer investors better upside potential than bonds and it seems improbable that shareholders will be sellers as indices achieve new highs, if history is any guide."

Levkovich has been vocal about this bullish demographic trend for almost five years.

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Investors are worried about what the aging of baby boomers means for the markets.

Specifically, they're concerned baby boomers will pour out of stocks and into bonds to reduce risk profiles throughout retirement. This would be bad news for the stock market.

But BMO Capital's Brian Belski highlights another demographic trend that could counter the negative effect from the baby boomers.

"[W]e believe these investors are ignoring an even more important demographic trend," Belski wrote. "Specifically, the size of the baby-boom echo (children of baby boomers aged 30 through 39) will be growing meaningfully in the coming years, and growth in this cohort has historically had a direct impact on stock-price levels."

Citi's Tobias Levkovich has also been vocal about this bullish trend. He argues that as these baby boomers' kids enter the age bracket in which most people buy their first home and have a couple of kids, they'll start saving aggressively in the stock market.

"Some estimates suggest that more than $40 trillion of wealth will be transferred by 2060 from aging Americans to their offspring and grandchildren, with the potential for continued consumption at a more impressive pace than is generally expected," Levkovich added. "Despite the two major equity bear markets of the past 15 years, equities still offer investors better upside potential than bonds and it seems improbable that shareholders will be sellers as indices achieve new highs, if history is any guide."

Looks as if demographic trends may net positive in the longer-term stock outlook.

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When you see the value of your investments drop before your eyes, your brain sends a funny feeling into your belly that makes you panic and want to "sell!"

With the global rout we're experiencing right now, that's a feeling that a lot of investors and traders may be getting.

While there's no guarantee that prices won't fall farther, history shows that it's moments like this that prove to be the best times to buy.

"Be fearful when others are greedy, and be greedy when others are fearful," Warren Buffett says.

This is what's called a contrarian strategy.

One of the more popular metrics used by contrarians is Bank of America Merrill Lynch's proprietary "Sell Side Consensus Indicator," which measures bullishness and bearishness among professionals based on how they're recommending clients allocate stocks in their portfolios. When many of them recommend avoiding or staying underweight stocks, this is a reflection of bearishness. And, as a contrarian indicator, this is interpreted as a signal to buy.

According to BAML's Savita Subramanian, this indicator isn't screaming extreme bearishness, but it's at the far bearish end of neutral.

"[T]oday’s sentiment levels are still near where they were at the market lows of March 2009 and over 12pts from the level of extreme bullishness that would indicate a contrarian “Sell” signal in our model," Subramanian wrote in a note to clients on Tuesday. "Strategists are still recommending that investors significantly underweight equities, at 54% vs. a traditional long-term average benchmark weighting of 60-65%."

"With sentiment still near the bearish end of the “Neutral” range of our model, implied 12-month returns are still very robust at +17%," she added.

Citi's Tobias Levkovich was on Bloomberg TV Monday afternoon discussing Citi's proprietary "Panic/Euphoria Model," which is a model that factors in nine metrics like the NYSE short-interest ratio, margin debt, Nasdaq daily volume as % of NYSE volume, the put/call ratio, AAII bullishness data, and others.

"Statistically, you’re talking about a 96% probability that markets are up 12 months later," Levkovich told Bloomberg's Alix Steel and Scarlett Fu.

In a note to clients in August, he wrote that this level of panic has seen an average 12-month return is 17.5%.

Barclays' Ian Scott also circulated a note to clients noting the collapse in sentiment as measured by the Investors' Intelligence survey.

"Sentiment towards stocks is now firmly below average, with just 9% more bulls than bears," Scott wrote. "While we would be the first to acknowledge that sentiment does not have a “call” on the market before 2009, in the post Financial Crisis environment, it certainly has. Indeed, whenever the percentage of bulls has dropped below 9.5% the market has consistently been higher 6 months later, with an average gain of 22%."

Ultimately, you'll want to think carefully before making any investing decision. What you see above is just the history.

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Budget drama threatens to rattle the confidence of investors as the US Congress once again scrambles to get its fiscal house in order.

But that's arguably a sideshow to a much bigger problem faced by companies in the US stock market: weak earnings.

"Politics aside, [third quarter] earnings season could prove turbulent given recent macro developments," Goldman Sachs' David Kostin wrote on Friday.

"For a second consecutive quarter, economic turmoil in China alongside mixed US economic activity and a generally strengthening dollar will likely weigh on corporate results."

Earnings are the most important driver of stock prices. Stock prices, for their part, have already experienced heightened volatility lately, with the S&P 500 now down over 8% for the year.

And lately, earnings growth has flattened out and expectations are for growth to actually go negative in coming periods.

In a video released early Tuesday, billionaire investor Carl Icahn observed that corporate earnings were looking fragile, and he questioned whether there would be any buyers as investors look to dump stocks.

Kostin believes that volatility could be exacerbated by the fact that buybacks of corporate stock, which have helped fuel the bull market, are expected to scale back in the coming weeks.

"Most S&P 500 firms have already entered their buyback blackout windows, and are therefore prevented from executing discretionary buybacks beyond the automatic share repurchases taking place through 10b5-1 plans," Kostin said.

Wall Street is slashing its outlook for stock prices.

In a follow-up note on Monday, Kostin cut his year-end target for the S&P 500 to 2,000 from 2,100. He joins peers at RBC Capital, Bank of America Merrill Lynch, Credit Suisse, and Deutsche Bank, who have all cut their targets for the S&P in recent weeks.

In addition to economic concerns, Kostin pointed to elevated valuations (i.e., the price-earnings multiple) during a time when the Federal Reserve is about to tighten monetary policy. Goldman Sachs' house view is that the Fed will raise policy rates on December 16.

"Historically, rising short-term interest rates have been associated with declining P/E multiples," he wrote.

This is not new.

Strategists including RBA's Rich Bernstein and HSBC's Ben Laidler have argued that the Fed could be a problem as earnings-growth expectations have flattened out and, as Kostin noted, interest-rate hikes are associated with investors wanting to pay less for earnings growth.

Kostin, however, sees earnings growing. In 2016, he sees S&P earnings per share climbing to $120, bringing the index to 2,100 by year-end.

Guidance will be key

Nobody likes volatility. But sell-offs could prove to be buying opportunities for forward-thinking investors. And investors and traders may quickly bid up prices if they feel as if the outlook for is rosier than what the market is pricing in.

"A focus on guidance and insight into EM business activity could prove crucial for subsequent stock price performance," Citi's Tobias Levkovich wrote on Friday.

"It is our opinion that the earnings guidance coming out of the reporting season is likely to be a bit better than the current agitated zeitgeist presumes," he continued.

"Indeed, the rolling 10 weeks of guidance has shown some improvement in terms of the percentage of companies providing upward views and we suggest that few investors really can relate to that development. There tends to be a more attuned ear to confirm existing beliefs (in order to avoid cognitive dissonance) and thus positive news gets looked over if in conflict with the prevailing predisposition."

So, while Kostin warns of volatility, Levkovich sees potential opportunity.

"We suspect that some investor confidence can build from earnings in the next few weeks rather than confirm the current negative slant," Levkovich said. "Accordingly, we sense upside opportunity especially in the face of such negative investor sentiment."

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Surging yields in the junk bond market have everyone nervous that it's going to get a lot tougher for businesses to access financing.

For the most part, surging junk bond yields have largely been due to surging yields in the market for energy bonds, an industry that's seen cash flow tank as oil prices crashed.

For now, many indications suggest that it is still pretty easy for businesses to borrow cheaply.

"Investors get appropriately worked up by the higher financing costs found In the junk bond world but they also need to track small business credit availability to see if the thus far contained energy sector related high yield issues are spreading," Citi's Tobias Levkovich writes. "Fortunately, Figure 5 illustrates that the small business pressures have not emerged and one needs to see both the high yield market and small business credit environment to worsen to drive a recession as was seen in 1989-90, 1999- 2000 and 2007-08."

"Two percent of owners reported that all their borrowing needs were not satisfied, a record low," the NFIB explained. "Thirty percent reported all credit needs met, and 57 percent, a record high, explicitly said they did not want a loan."

And it's not just small businesses where lending appears to be readily available.

"In addition, the senior loan officers' survey for business loans does not underscore the stress normally associated with an imminent recession," Levkovich added.

 Historically, however, the senior loan officers' survey tends to follow what's happening in the junk bond markets. In other words, while lending may be easy now, tougher lending conditions may be on the horizon.

For Levkovich, he would just say to be wary of the non-energy companies complaining about tough conditions today.

"These data points do not argue that worse credit figures are not coming down the pike, but they have not arrived yet, implying that some management teams may be crying wolf to cover up their judgment errors," he said.

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One of the bigger themes since the financial crisis has been the fattening of corporate profit margins as businesses across America hacked away at their cost structures and squeezed more out of their existing resources.

But with the economy rebounding and putting people back to work, the labor market has gotten much tighter. And today, that's manifested in the form of wage growth as companies are being forced to raise pay in order to recruit and retain talent.

And as the business cycle proceeds, wage growth will eat into profit margins in a big way.

"Investors are appropriately worried about margins falling more sharply given that labor costs account for more than 60% of corporate expenses and small companies need to lift employee compensation but do not seem to have pricing power to offset related higher expenses," Citi's Tobias Levkovich said.

Now, much has been written about how turns in profit margins signal recessions.

But Levkovich isn't that concerned about that as of yet.

"Fortunately, the conditions do not seem set for an economic downturn given that small business still has access to credit and continue to look to hire more workers," he noted. "Furthermore, rising compensation costs are not that problematic for EPS growth as one could see some top-line acceleration from stronger consumer spending tied to more worker income and pent-up demand."

Levkovich is positive on the stock market. He sees the S&P 500 heading to 2,300 by mid-2016. On September 4, he introduced a 2016 year-end target of 2,200.

"We remain generally constructive longer term while advising investors to buy on weakness rather than chasing the tape," he said.

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This summer, six years into the current bull market, one of the biggest concerns we heard repeatedly was that valuations were looking rich.

As measured by the price-to-earnings ratio, or PE, the market multiple had been well above average for months. And depending on how you measured earnings and how you calculated your average, you could argue that the multiple had been above average for years.

It was at a level that had many reluctant to buy stocks. And it had some even recommending selling stocks.

And then August happened. Stocks came crashing down as the sum of many fears seemed to be coming to a head. China had unexpectedly devalued its currency, and markets came tumbling in what appeared to be confirmation of the bearish signal telegraphed by the ongoing rout in commodities.

It was around that time that in a period of two or three days a couple of analysts all flagged the same metric: the PE ratio.

• "The valuation correction does seem in place," Citi's Tobias Levkovich said in an August 24 note.
• "S&P valuation back to normal," Deutsche Bank's David Bianco said in an August 25 note.
• "The forward PE is 15X currently, lower than the implied PE of corporate bonds (inverse of yield) and barely above HY (which is barely at a discount)," FundStrat's Tom Lee said in an August 25 note. "Stocks are -0.6 standard deviation from long-term average, or cheap."
• "The S&P 500 PE ratio fell to 15.5x, a level not seen since October of last year," Barclays' Jonathan Glionna wrote in an August 25 note. "As shown in our poster report titled Is 17x earnings expensive?, the S&P 500 total return for the next 12 months has averaged over 11% and 20% for PE ratios of 15x and 16x, respectively."

And so on August 26, we published "One good thing has come from the stock market rout." It was an opportunity for all the valuation worrywarts who were reluctant to buy with valuations so high.

That day, the S&P 500 opened at 1,872. This was the same week the index set its 52-week low of 1,867.

Today, the S&P is near 2,060, up 10% in just four months.

Admittedly, we are cherry-picking posts here. And while we are not in the business of giving investment advice, we can comfortably recommend that you do not trade on any single post you read on BusinessInsider.com.

Having said that, if you read Business Insider, subscribe to the Markets Chart of the Day email, or follow @chartoftheday on Twitter, you can't exactly say you didn't know this correction in valuations occurred.

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For investors in the stock market, nothing is more important than earnings.

In the long run, earnings and the expectation for earnings growth is what gives stocks their value.

In the short run, there is a wide variety of forces that can affect market pricing and sway investor sentiment. These forces include anything from the timing of stock buybacks to the fear of terrorism.

This time around, however, short-run concerns about earnings may arguably be the catalyst for the recent bout of volatility in the stock market, which has seen the S&P 500 tumble 8% in the past two weeks.

“Notably, institutional investors were worried about earnings in our late 2015 client survey (see Figure 9) and they have been proven right as was the likelihood for a pullback over a rally,” Citi’s Tobias Levkovich said on Thursday.

And it's all about the ongoing crash in oil prices.

“The near 20% decline in crude prices year to date is forcing additional cuts to the earnings outlook,” Levkovich said. “While the Energy sector contributed an estimated 5%-6% of overall S&P 500 EPS last year, it could plunge another 40% this year. Thus, we are trimming $2.00 from our prior 2016 forecast to $126.50. Thus, the profit growth outlook is cut back to around 5% from the previous 7%.”

Levkovich joins his peers at RBC Capital, Deutsche Bank, and Goldman Sachs who have all warned clients about the costly toll of tumbling oil prices.

"With earnings estimates dipping back, it is fair to imply that the S&P 500 will not achieve the 2,200 year-end 2016 target that was projected last September but be more like 2,150 (and 18,500 on the DJIA)," he said.

You can blame the Fed, or China, or whatever for exacerbating volatility in the markets as risk premiums spike. But when it comes to fundamentals, nothing is more fundamental to investors than earnings, and the outlook for earnings is not looking good.

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The crash in oil prices might be all about the dollar.

In a note to clients on Monday, Tobias Levkovich at Citi asked a simple question: What if the collapse in oil prices is all about the dollar?

Levkovich notes — as others have before— that the price of West Texas Intermediate crude and the value of the US dollar are inversely correlated, meaning one drops as the other rises.

We've seen a huge rally in the dollar over the past 18 months, while the price of crude has collapsed.

Recently, we've heard that a lack of demand, a glut of supply, and the collapse in commodity prices signal terrible things about the future of the world economy. But if you're looking for a root cause behind the drop in oil prices, you should perhaps look no further than your wallet.

"While investors have been fixated on the demand dynamics of emerging markets bumping against excess supply derived from super cycle expansion programs, it seems as if the greenback can explain much of the movement," Levkovich writes.

Levkovich adds (emphasis ours): "Investors have been focused on the US dollar but have tried to decipher something more elaborate for agricultural, mineral and crude products ... Nonetheless, investors may just need to look at just one factor rather than a plethora of inputs."

Just an idea.

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• Business Insider recently spoke with Tobias Levkovich, Citigroup's chief US equity strategist, about what's keeping investors complacent.
• Levkovich explained why earnings may not produce the same stock market gains witnessed last year and outlined what he considers the most underappreciated story in markets right now.

After a volatile first quarter, some investors were counting on earnings season to be the salve for the stock market this year.

That isn't likely to be the case, according to Tobias Levkovich, Citigroup's chief US equity strategist. In his view, strong earnings growth is one of two things keeping investors complacent.

Levkovich recently spoke to Business Insider about why this is the case, what sectors could contribute to the market's growth this year, and the folly behind looking for a straightforward market catalyst.

This interview has been edited for length and clarity.

Akin Oyedele: The big story in markets lately is the 10-year yield hitting 3%, so I wanted to get your take on that and what it means for stocks.

Tobias Levkovich: Let me set the stage a little bit.

We started the year with the idea that it will be one of consolidation and rotation.

By consolidation, we meant that you would get very strong earnings growth, but you wouldn't see the full benefit of that in the price of stocks. In other words, you'd see multiple compression.

So if we believe earnings will be up 14-15%, you might only get 5% in equity-market appreciation and lose 10 points on the multiple. I don't mean the P/E goes from 20 to 10 points — I mean you'd lose some of that appreciation.

The move in the market in 2016 and half the move in 2017 was multiple-related, kind of anticipating a more pro-business, pro-growth agenda. And as you got it, you were earning your way into it — you already paid for it, and you're not going to get paid a second time.

We also expected some inflation and some higher bond yields.

So again, this idea of consolidation was more about looking at history, trying to understand how markets trade, and the sense that there's probably more wage inflation than people perceive.

No. 2, we talked about rotation. In an environment where bond yields are climbing, you typically see value beat growth. That doesn't mean week-to-week or in the earnings numbers, and I kind of almost don't respond to those day-to-day moves. I find them noise, not signal.

We like financials. We like energy. We like more cyclical components of the economy. We've been underweight staples. Year to date, as of last night [Wednesday], energy's outperformed tech. That's not on most people's minds. We downgraded diversified financials about a week and a half ago from an overweight. We're still overweight banks and insurance. Some of the banks came through with some numbers that the Street clearly didn't love.

So let's talk just a moment about earnings in general.

Very few companies are going to stick their necks out and say everything's fine.

Earnings have been far better than people thought, yet stock prices haven't necessarily reacted to them. We recently wrote a piece saying that earnings would not heal the troubles in the market. People were hoping that it would occur that way, and we said we didn't expect it to.

Most people want to get some sense of outlook into the latter part of this year and into whether 2019 is OK; there has been a lot of concern about end-of-cycle issues. So what I'd love to get from company A, B, or C is some feeling that I'm OK for earnings into the latter part of this year and maybe even into 2019.

It's April. Managements don't know that in April. You're asking them to make a call for what December or next April looks like. They just don't have that visibility. So what you're kind of really asking from the companies is not did you have a good first quarter, but how do the third and fourth quarter look?

Companies have visibility a quarter out — maybe if you're lucky, two quarters out, but you certainly don't have nine or 12 months out. And very few companies are going to stick their necks out and say everything's fine and "We think we can up the numbers for the year" when there's potential for them to disappoint. If that was the visibility that people wanted, they weren't going to get it in April.

Earnings have been far better than people thought, yet stock prices haven't necessarily reacted to them.

Two things are keeping people complacent. One is that earnings are really good. Markets don't generally blow up if earnings are good.

Two is there a Fed put out there at what strike price? Thus far, it's not down 5, 10%, because the Fed hasn't indicated that and we've already had that kind of correction. But is it 15%? Is it 20%? And there's the sense that there's a potential feedback loop in that if markets go down enough, management teams and companies would be worried that there's some kind of discomforting, sinister signal from the market, and as a result, the Fed will have to stop being aggressive.

I think those are the two things kind of keeping people complacent. There isn't really fear out there. You almost need fear, and you need some time, to prove that the concerns around the end of the cycle are overdone.

Oyedele: Your year-end S&P 500 target is 2,800. How do we get there from here?

Levkovich: If earnings are up 14% or 15% and we lost a little multiple, getting up 5% is not asking for the moon.

We have eight to 10 different ways we target our S&P approach. We look to a variety of factors and see where most of them congregate. We don't use the signal factor.

I was talking to someone earlier today, and said I'm getting clients asking to report on my recent trip to Asia, and one of the questions is what's the catalyst to make the market go up — that kind of magic-bullet question. And this guy was telling me, "I hate that question." And I said that's not the question I hate. It's a reasonable question.

This idea of a nice, simple 'if A occurs, B follows' is not the market.

Here's the question I hate: What multiple should the market trade at? My answer to that typically is: Who died and made me king that you have to follow what I say? I can have a view on what the market should trade at, but that doesn't mean investors will trade it that way. So what I need to do is look at how markets trade price-to-book against inflation, how markets trade on historical P/Es, what have been the market outcomes.

I don't for a moment assume — and my ego just isn't big enough to assume — that everyone's going to listen to me because I think the multiple should be X. Honestly, who the hell cares what my viewpoint is on that? I'm honest about this. I don't have enough money to force the outcome. Mr. Bezos doesn't have enough money to force the outcome. It's a $26 trillion market. Why would you think that your opinion matters?

You get my point. To me, these are foolish questions because they don't really matter.

Oyedele: So what are the right questions to be asking?

Levkovich: I think you have to look at a variety of things, and that's the problem — everybody likes a simple answer.

Here's the example I often give to people: If you eat a lot of food, you're going to gain weight. That sounds like a very reasonable cause and effect.

Now let me give you three things that say that's not true: If you ate a lot of vegetables and fruit, you probably aren't going to gain weight; No. 2, if you work out like crazy, you're probably not going to gain weight; and No. 3, people who I've learned to really hate, people who have very fortunate, fast metabolism, aren't going to gain weight.

So the starting statement was kind of true — except that I gave you three examples that shoot it down in a second.

So this idea of a nice, simple "if A occurs, B follows" is not the market. The market has multiple influences, and you have to think about if there are 10 different things that affect it, where's the body of evidence leaning? Which is, by the way, how our Panic/Euphoria Model works. There are nine factors in the model. They sometimes conflict, and that's OK, because that's the real world.

The comfort level that people have in wage growth ... in the 2.6-2.7% range is probably very inaccurate.

We're all pretty good at preselecting information that backs up our fears. It's really bad when you're telling clients "I have a piece of evidence that supports me, and I'll ignore the other ones that don't." That's not helping people.

Oyedele: What's an example of a viewpoint out there that you think is accurate but perhaps unpalatable for investors to hear right now? Another way of phrasing that is: Is there anything on your radar that you think the market's underappreciating?

Levkovich: I think people have been underappreciating what's been going on in the labor force. We've been hearing from companies for a while about how tight it is to get good workers.

It started off, let's say, in the homebuilders last year. Another example is the trucking industry. But we're hearing it from industrial companies, we're hearing it from energy companies — it's becoming much more widespread. And that's why the comfort level that people have in wage growth of February and March in the 2.6-2.7% range is probably very inaccurate.

When you look at the gap between U6 and U3 unemployment rates, it tends to be a really good measure for what happens to wage inflation. And it is likely that gap is going to shrink based on some outlooks we've done in the course of the next six to nine months. That's going to put even more upward pressure on wage inflation.

Companies are going to try and raise prices. Not every company will be able to, but most will. And they're going to pass them onto you and me as consumers, and that will push some of the inflation data higher, with some bond-yield reaction to it.

Rising inflation expectations over the last 20 years meant buy cyclicals, not defensives. So if the market is going to do what it's done for the past 20 years, then it's probably going to do it again, unless you go thinking this time is different. It's a lot sexier to say this time it's different. But every time you hear those great paradigms of change, they almost rarely play out. We all like new and exciting things, but are they really sustainable?

And I won't even discuss bitcoin.

Somebody brought this up to me earlier today, which was: It's interesting that the stuff you would have thought you were essentially safe in, like staples, you've just been crushed. It's one thing to underperform. It's another thing for some of these stocks to be down 10-20% since the beginning of the year.

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• Tobias Levkovich, Citigroup's chief US equity strategist, is among several strategists on Wall Street sounding a cautious tone on technology stocks. 
• Last year, big tech gave the stock market its largest gains. 

The chorus of strategists calling for caution on tech stocks keeps getting louder. 

Tobias Levkovich, Citigroup's chief US equity strategist, is among those who say the sector is unlikely to repeat its role in 2017 as the stock market's leader. Strategists at Bank of America Merrill Lynch, Goldman Sachs, and Morgan Stanley have also sounded a cautious tone on big tech.  

"We're not telling you these stocks are going to crater," Citi's Levkovich told Business Insider in a recent interview. "We are saying they could underperform, which is a very different story."

Some of the big tech news of the year that has added to investors' caution has come from the so-called FAANGs that propelled the market last year; the Nasdaq 100 surged 21% last year. As Facebook continued to deal with election interference, the harvesting of its users' data by a quiz app and Cambridge Analytica was blown into the public's view. President Donald Trump went after Amazon for crushing smaller retailers. Analysts were worried about sluggish iPhone X demand. 

Coupled with Levkovich's list of reasons why tech could underperform is a slew of longer-term trends, or what he called "demand functions," that are driving the sector: mobility, the cloud, cybersecurity, automation, virtualization, and artificial intelligence.

However, an investor who's counting on tech stocks to beat the market would be disappointed, if his call turns out to be prescient. 

"You need new buyers to come in and you need to give them catalysts to buy," Levkovich said. "Right now, I can give you a couple of reasons why they might not want to buy." 

Here are six of his reasons why: 

1. Higher bond yields mean the present value of future earnings or cash-flow streams are hurt. Secular growers tend to have an issue when you have higher bond yields.
2. If the economy is somewhat better — and that's why bond yields are going higher — then investors have other options to get growth at lower prices. They can buy cyclical alternatives to tech that can grow rapidly at a lower PE.
3. There are concerns about more regulation, which would bring higher costs.
4. The European Union is considering new taxes for large tech companies.
5. Projected earnings-growth rates indicate a slowdown in the second half of the year for tech — an industry that tends to be driven by growth and momentum. 
6. Many stocks, in the software and services industry for example, are not undervalued, and Citi's valuation metrics that have been the most predictive of stock price performance are suggesting these stocks can underperform.

"But what about strong earnings?" is a reasonable retort to Levkovich's view.

However, even beyond tech, he's not counting on first-quarter results to be the medicine that heals the market after a volatile start to 2018.

Heading into 2018, Citi's view on equities was that it would be a year of consolidation, among other things, after the prospects of tax reform and fiscal stimulus jolted the market in 2017, sending several measures of equity valuations including the price-to-earnings multiple to eyebrow-raising levels, .    

"The move in the market in 2016 and half the move in 2017 was multiple-related, kind of anticipating a more pro-business, pro-growth agenda," Levkovich said. "And as you got it, you were earning your way into it — you already paid for it, and you're not going to get paid a second time." 

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Earlier this year, quarterly earnings and forward guidance arguably became irrelevant metrics as the COVID-19 pandemic upended business conditions and plunged the economy into its worst crisis since the Great Depression.

Michael Gayed, a portfolio manager at Toroso Investments, was among the experts who treated the typically crucial metrics with a grain of salt. 

"Earnings, I would argue, will matter for the high-tech companies that are enormously overvalued, just to provide some kind of narrative around why those valuations might be justified," he told Business Insider in June leading up to the second-quarter earnings season. 

He added: "But beyond that, I don't know if earnings matter at all at this point."

Now, as third-quarter earnings approach and business conditions slowly normalize, investors may want to start paying attention. That's what Citi's chief US equity strategist, Tobias Levkovich, says, at least.

Levkovich said in a recent note that the economic recovery that's underway is leading analysts to upwardly revise their earnings estimates at "unsustainable levels," and this could lead to disappointments that hurt share prices when third-quarter reports are released. 

In other words, the proportion of third-quarter earnings revisions that are positive is historically and unrealistically high. For example, nearly 90% of earnings-per-share revisions in the S&P 500 autos and components industry have been positive so far. The share is a little over 80% for software and services companies.  

"Historically, stock prices are heavily influenced by the rate of change. It's not necessarily change, but the pace of that process," Levkovich told Business Insider by phone on Tuesday.

"So if you're already at an extended level where 75% of all pre-announcement revisions are to the upside, and we look at history, it's kind of an unsustainable level."

He added: "If it starts to drift a little lower — let's say it goes to 55% from 75%, just as an example — it's still really good, the majority of numbers are still going up, but it was better before. So it's viewed as somewhat of a loss of momentum. And typically, stock prices tend to trade on that."

He cited banks tightening their lending standards for big businesses and ongoing weakness for small businesses as challenges facing companies in the third quarter.

Levkovich pointed to several industries where upward revisions have gone especially high, namely: autos, software, transportation, utilities, retail, consumer services, real estate, semiconductors, and food, beverage, and tobacco.

However, he added that healthcare, tech, and consumer staples are set for the smallest declines in year-over-year earnings per share: each of those sectors are expected to lose less than 5%. 

Still, Levkovich said he didn't want to overstate his concern for broader downside numbers, but stressed investors to keep the possibility in mind.

"We do not want to overemphasize the point around overall revision momentum, but we must recognize that it is at an extreme peak and investors have often stepped back as the numbers slipped if we look at past trends," he said in the note.

He also added that investors should pay most attention to any forward guidance firms give on their earnings calls.

"Forward guidance will be crucial and we suspect C-suites may stay guarded given uncertainties surrounding the pandemic, vaccines, elections, and the status of any new fiscal stimulus," Levkovich said in the note. "Admittedly, things are better than they were at the end of June, though temporary layoffs are turning into more permanent affairs."

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