Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 trades at the high end of the range in place since June 8th. But although the index has generally moved sideways in recent weeks, there has been plenty of shuffling beneath the surface. After reaching extended levels in the short term, many of the large tech-oriented companies have consolidated in recent days. On the flip side, many of the more economically-sensitive cyclical areas have gained strength this week on optimism over a COVID-19 vaccine. We view this cyclical rotation as healthy for the market. Technology stocks have generally carried the market thus far, so these other areas will need to improve in order to push the S&P 500 materially higher.
Technically, S&P 500 resistance at the June 8th peak of 3233 remains in place. We would not be surprised for choppiness to continue in the short term, as numerous high-frequency economic indicators have stalled over the past several weeks. This comes in conjunction with a rise in the virus spread, accompanied by many communities pausing or even back-tracking on their economic reopening processes. Q2 earnings season is also underway, which is expected to mark the fundamental trough of the virus impact (S&P 500 earnings expected to contract -44%). Due to a lack of guidance in Q1 and vast uncertainty in the current environment, analyst estimates are historically wide. This can lead to large surprises and also large swings on results. For example, 11 financials stocks have reported thus far with 7 trading up by an average of 2.1% while 4 traded lower by an average of -4.1% on their announcements. On the whole, 21 S&P 500 stocks have reported and experienced an average price reaction of 0.15%. Q2 earnings season ramps up next week with 79 S&P 500 companies reporting. The most stable earnings are expected from the Utilities, Technology, and Health Care sectors. Since the end of Q1 earnings season, the best estimate revisions have also come from these three sectors with particular strength from Health Care.
Despite our belief that the market could experience more sideways grind as it continues its range-bound trading in the short term, we continue to believe that weakness should be used to opportunistically accumulate favored stocks for the longer term. We acknowledge the potential for volatility to occur (virus spread, election, China tensions), but believe the enormous global stimulus outweighs these potential concerns. Technically, the S&P 500 experienced a golden cross over the past week (50 day moving average crosses back above the 200 DMA). Historically, when this has occurred out of bear markets, the returns are very bullish. In the prior 9 times since 1930, every period saw the S&P 500 move higher over the next 12 months by an average of 23.8%.
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