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January 15, 2021

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

Short-Term Summary

Since breaking out to new highs in November, the S&P 500 has continued to glide higher through the seasonally strong period of the year. Enormous strength from the most risk-on areas during this time frame was triggered by positive vaccine news in early November, allowing for optimism toward an economic reopening in 2021. Technical momentum toward the reflation trade remains strong with added support in recent days from positive vaccine news (Johnson&Johnson early vaccine study) and reports that President-elect Biden is set to unveil a ~$2T fiscal stimulus package tonight (on top of the $900B in relief passed a few weeks ago). The unprecedented amount of both fiscal and monetary stimulus remains supportive of equity markets in our view.

Eventually, the market will need to digest this strength but, for now, the trend remains your friend. The S&P 500, along with some of the more cyclical areas (i.e. small caps, banks, equal weight consumer discretionary), have been able to trade above their 20-day moving averages since early November. We will be monitoring price action around this level for potential cracks in the short term trend that may lead to an eventual digestion period. But for now, short term momentum remains strong. Supporting this view of underlying equity market momentum is continued relative strength in the banks vs. utilities, as well as consumer discretionary vs consumer staples.

Fundamentally, Q4 earnings season unofficially kicks off on Friday with several of the large banks. Consensus estimates reflect -10.3% S&P 500 earnings growth on -2.2% sales growth for the quarter. The best earnings growth is expected to come from the Materials, Health Care, and Technology sectors. Q2 and Q3 earnings results saw over 80% of S&P 500 companies beat their bottom-line estimates (well above the 15-year average of 68%), as analyst estimates proved too low in the initial stages of the recovery. Solid momentum in economic data throughout Q4 bodes well for companies beating Q4 earnings estimates in our view.

Not only did a large amount of companies beat their estimates in Q2 and Q3, but they did so by historical margins (results finished an enormous 23.6% and 19.3% above estimates respectively- largest on record). We expect a strong Q4 earnings surprise above the historical average of 4.5%, but less than the historically strong Q2 and Q3. In fact, 19 S&P 500 companies have announced Q4 results early with an earnings surprise of 11.5%. This supports our above consensus earnings estimate for 2021 of $175, as estimate revisions continue to trend higher. With  the market run-up in recent months on optimism for 2021, it will be interesting to assess how stocks react to Q4 results (i.e. the bar could actually be set high). Nevertheless, we remain positive on the economic and fundamental recovery in 2021 and would use pullbacks in favored sectors and stocks as buying opportunities.

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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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