Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The market continues to wrestle between the stalled reopening process leading to a moderation in the trajectory of economic improvement and a much better than expected Q2 earnings season so far. In the coming days, investors will also be focused on an additional fiscal package with the current program expiring tomorrow. We view this aid as very important for the economy and market, and as such we believe it ultimately will come in size (likely in $1.5-2T range). In the short term, we remain steadfast in our view that the market is likely to continue in its grinding pattern with sector swings beneath the surface.
Market performance remains fairly narrow with strength from mega-cap tech-oriented stocks masking the weakness felt by many other areas. For example, the S&P 500 is just 5% from new highs but 42% of its stocks are still down over 20% from their highs. In fact, if just AAPL, MSFT, GOOGL, and AMZN were removed, the S&P 500’s year-to-date performance would be 5% lower. These four companies make up 15% of the S&P 500 and are up 33% YTD on average. Also important to note is that three of these- AMZN, GOOGL, and AAPL- report Q2 results after the market close today. The positive relative strength trends of tech-oriented stocks, as well as large vs small and growth vs value have correlated with fundamental strength through the pandemic. The more beaten-up deep cyclical areas will have more leverage to the economic recovery over time, but will also be more volatile. Given our view of short-lived sector rotation as the market continues its generally range-bound move, we stick with the areas best positioned through the current environment for now (Technology, Health Care, Communication Services) along with Consumer Discretionary (e-commerce strength and stimulus supporting the consumer).
Fundamentally, Q2 earnings results continue to come in much better than feared. 83% of S&P 500 companies have beaten on the bottom line (above the 5-year average of 72%) with aggregate results 11.5% above estimates (also well above the 4.7% 5 year average). This has resulted in the S&P 500 Q2 EPS estimate being revised 6.7% higher so far, along with 2020 and 2021 estimates also being revised higher. The best Q2 estimate revisions have come from Health Care, Materials, and Consumer Discretionary sectors. Despite our expectation for volatility to occur (uncertainty surrounding virus spread, election, geopolitical tensions), we continue to believe that enormous stimulus globally fueling the global economic recovery outweighs these potential headwinds. Also, record low interest rates (and likelihood they stay lower for longer) support elevated valuations and continue to make equities relatively attractive (vs other asset classes). With our view of a grinding pattern for equities in the short term, we would reserve some buying power to take advantage of weakness as it occurs.
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