Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
There is no shortage of market-influencing variables at the moment. The on-again, off- again news flow of stimulus talks continues. We remain skeptical of additional fiscal aid ahead of the election with policy differences the major obstacle to a deal. This provides less of a cushion for consumers in the short term, but we believe the overall recovery can continue (potentially at a slower pace) and still believe fiscal stimulus is likely to come after the election.
The Presidential election is also just one month away with the betting odds trending in favor of a Biden win and a potential Democratic sweep. Emotional responses to the election outcome can often create short term volatility at the sector level. However, we do not believe dramatic changes to portfolios should be made based on the election alone. Overall, we do not believe the election outcome will alter the over-riding theme of this environment over the intermediate term, which is an economic recovery supported by stimulus in the early stages of a bull market.
Elsewhere, there has been encouraging COVID-19 therapeutic data from Eli Lilly and Regeneron over the past week. Importantly, both treatments- using neutralizing antibodies- are for non-hospitalized patients. This is promising as previous therapeutics have been for patient use in the hospital and on oxygen support. Additionally, RJ Biotechnology analyst Steve Seedhouse believes we could have two vaccines- Pfizer/BioNTech and Moderna- with emergency use authorization by the end of November. We expect better news on a vaccine and therapeutics to continue, and this contributes to our positive stance on equities over the next 12 months.
If that wasn’t enough, Q3 earnings season begins next week. Estimates have been trending higher into the results on better than expected economic data, now reflecting a -21% earnings contraction y/y (but +18% q/q sequential improvement). We do not expect earnings to beat as drastically in Q3 as they did in Q2 (a historic ~25% surprise to the upside), but we do expect an overall positive quarter with continued earnings improvement moving forward.
Through all of this, market behavior has been encouraging. The S&P 500 was able to push above horizontal resistance at 3429 today, which (if able to hold) puts the path of least resistance up to prior highs at 3580. Market internals are also firming up for the next move higher in our view. The S&P 500 advance/decline line broke out to new highs. We note good leadership from the semiconductors and transports- positive indications of economic and equity market momentum. Also, participation is broadening out with the small caps breaking to new recovery highs. The potential for choppiness is there, but all of this bodes well for equity market momentum over the intermediate term.
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