January 29, 2021
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Volatility has picked back up over the past two weeks, disrupting the glide path higher for equities that has largely been in place since positive vaccine news in early November. While the S&P 500 remains near highs and was able to hold its 50-day moving average today, there have been larger draw downs beneath the surface. For example, some of the more cyclical areas- energy, financials, materials- have underperformed since earnings season began, whereas some of the more tech-oriented areas have gained strength. We view this as a natural “cooling off” of momentum. Today’s bounce-back from support for the S&P 500 is positive, but the underlying tone is mixed with the small caps actually trading lower and only 51% advancing volume on the NYSE. Nonetheless, many areas have drawn down enough that we would use pullbacks in favored stocks near support levels as buying opportunities.
Q4 earnings season continues to be solid, albeit at an expectedly reduced surprise rate. 84% of companies have beaten estimates, but at a running surprise rate of 11.7% (down from the historically elevated 21% average in Q2 and Q3). Fundamentals remain very bifurcated at the sector and company level with roughly 1/2 of companies reporting earnings growth y/y. Median earnings growth among these companies is 22% y/y, whereas the median earnings contraction for the other 1/2 of companies is -21%. The strongest results have come from Financials and Technology. For the S&P 500 index, full quarter estimates are being revised higher (by 3.3% so far), as are quarterly estimates throughout 2021.
These positive 2021 revision trends on strong earnings growth estimates remain supportive for equities over the intermediate term. And this is at least in part due to an improving economic backdrop. We are encouraged by the going 1M+/day rate of US vaccinations, and await the Johnson&Johnson vaccine results next week. We expect the results to support our view of 3+ vaccines with solid efficacy rates allowing for an economic reopening as 2021 transpires. This, along with support from fiscal stimulus and Fed accomodation, should provide economic momentum throughout the year.
But while we remain positive on equity markets, volatile periods are bound to occur. February is a seasonally slower period of the year, and the past couple of weeks could be a glimpse of at least rolling pullbacks taking place beneath the market surface. This market action also supports our current view on sector allocations- that being pro-cyclical exposure to the economic recovery ahead but also a healthy allocation to areas operating well through the pandemic. This barbell approach results in our overweight sectors being Technology, Health Care, Communication Services, Consumer Discretionary, and Industrials.
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