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Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

The S&P 500 is now positive on the year +1.4%, although performance beneath the surface continues to paint a different picture. The average S&P 500 stock is still down -7% year-to-date and the small caps are down -11%, while the Nasdaq composite is up 19%. The S&P 500 was able to break above its recent range this week, but sector performance during the move was very fragmented. We would like market strength to come with unification among sectors. The wide gaps in daily leaders and laggards fits with a market in “stalled mode” in our view. For example, there was a rare occurrence on Monday where the S&P 500 was up over 0.75% but decliners led advancers. When this has happened historically, performance in the next week or two has been choppy.

Q2 earnings are coming in above depressed expectations. 21% of S&P 500 companies have reported so far with 80% beating on the bottom-line and 73% beating on the top-line. This has resulted in S&P 500 Q2 expected earnings being revised 3% higher so far, led by the Health Care sector. Additionally, the average price reaction has been a solid 0.4%, and we expect wide swings at the individual stock level due to heightened uncertainty in the current environment (analyst estimate ranges are historically wide). Overall, a good earnings season so far and we are encouraged by forward S&P 500 estimates ticking higher.

Along with earnings season, investors are focused on the prospects of another fiscal package. The stalled reopening process is being reflected in some of the high frequency economic data lately, as the job market improvement moderates. This is likely putting added pressure on Congress to pass additional relief in August, following the expiration of current benefits at the end of this month. We believe another fiscal package is very important, and we expect it to come in good size (likely in the $1.5-2T range).

We have also been watching the US dollar and copper, which can have meaningful impacts on areas within the equity market. Copper is often looked at as an economic barometer and has surged to recent highs, influenced by a global recovery in demand as well as supply constraints due to COVID-19. Also, the US dollar is on the cusp of recent lows. While we expect copper to move higher and the US dollar to move lower over the intermediate term, we believe a pause in both is likely in the short term. This could result in a good buying opportunity for emerging markets and materials if they can consolidate some of their recent strength and pull in to support levels.

In sum: Despite some positives, we believe the market is still in a somewhat range-bound mode for the short term. We expect sector swings beneath the surface and would use weakness opportunistically.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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