January 22, 2021
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Q4 earnings season is off to a solid start fundamentally. 87% of S&P 500 companies are beating their earnings estimates by an aggregate surprise of 20.4% so far, in line with the historically strong Q2 and Q3 surprises. And only less than a week in to the reporting period, S&P 500 earnings estimates for the full quarter have already been revised 2.5% higher. However, the very early read on price reactions has been lackluster, as the average price change on results is -1.5%. For example, Financials stocks have beaten estimates by 27.8% in aggregate but seen an average price reaction of -2.4%. Interestingly, the only two sectors with positive price reactions on average are Technology and Communication Services. It is far too early to determine if this will be the pattern for the full quarter, but the extreme run-up in the more cyclical areas over recent months has likely set the bar a little high.
Accordingly, over the past couple of days, we have seen some rotation back into the more technology-oriented areas. The Nasdaq Composite was able to break to new highs yesterday and is positive again today, whereas the Russell 2000 has moved slightly lower. This is also seen in Growth stocks regaining some ground, while Value cools off. Two days do not make a trend, but it would not surprise us to see some consolidation in the “recovery” areas. The small cap index is up 33% since the early November vaccine news, and S&P 500 sectors such as Energy and Financials are up 51% and 24% respectively since then. Also, the need for consolidation in some of the cyclical areas may only show up beneath the surface rather than a broad-market drawdown. As pullbacks occur in favored stocks, we would use them as buying opportunities.
The strong start fundamentally to earnings season bodes well for continued positive earnings trends in 2021. Positive 2021 revision trends on already strong earnings growth assumptions are important, as earnings will be the necessary driver of market returns this year with valuation expansion likely over. We remain of the view that vaccines will enable an economic reopening as 2021 transpires, with the recovery supported by both fiscal and monetary stimulus. President Biden laid out his coronavirus relief package which includes $1.9T in additional fiscal stimulus. Reports indicate he would like to pass this with bipartisan support, which could result in the final number being watered down and time until passage taking longer. Nonetheless, we believe something eventually gets done. This supports our above consensus (base case) view to 2021 earnings of $175. As earnings recover, valuation should begin to normalize. We use a 23x P/E multiple in our base case S&P 500 assumption for 2021 (down from the current 28x P/E multiple), as the low interest rate and inflation environment remains supportive of still elevated valuations in our view.
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
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.
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monetaire et Financier” and Reglement General de l’Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Broker Dealer Disclosures
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.