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February 19, 2021

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

Q4 earnings season is winding down, as 79% of S&P 500 companies and 88% of its market cap has reported up to this point. In aggregate, results have been well ahead of expectations with 79% of companies beating estimates by 15.2%. Earnings are now positive on a y/y basis, and full quarter earnings growth should finish at roughly 2% y/y in our view. Forward estimates also continue to trend higher, though the pace has slowed slightly with most companies having reported. The best forward revisions have come from Energy, Financials, Communication Services, and Technology which have also been some of the best performing year-to-date. These fundamental and performance trends support our barbell approach to portfolio positioning- a balance between areas operating best through the pandemic and areas with the most leverage to the recovery.

Valuation ran up to elevated levels in 2020 (27.7x P/E currently), as investors discounted the eventual recovery along with unprecedented levels of stimulus and record low interest rates. As earnings growth turns positive y/y, the economic recovery gains steam, and interest rates tick higher, valuation should begin to normalize. We use an above consensus 2021 earnings estimate of $175, and apply a 23x P/E multiple for our base case S&P 500 target of 4025. However our bias is higher, considering momentum seen in the economic and fundamental recovery along with the likelihood for additional massive stimulus. $1.9T in fiscal stimulus is currently being discussed with an also enormous infrastructure spending package likely to follow it. Additionally, with encouraging trends in the virus spread, vaccine rollout, and an accommodative Fed, we believe economic growth is likely to surprise to the upside this year. Our current $175 earnings estimate assumes ~4.5% US GDP this year, while our bull case scenario of closer to ~6.5% US GDP could become closer to the base case if these enormous stimulus numbers come to fruition- which would result in our earnings estimate being closer to $190.

Technically, the S&P 500 has seen a slight consolidation recently with rolling pullbacks beneath the surface. Also as the S&P 500 index moved to new highs, the percentage of stocks above their 50 day moving average made a lower high. This can often be a precursor to a consolidation period and raises the odds of a pause or pullback (even if minor). As has been the case in recent months, these rolling pullbacks could be seen more at the individual stock and sector level. We view consolidations as normal and healthy, particularly given the strong gains in recent months and solid longer term technical backdrop (87% of stocks above their 200 DMA). This provides support to buying pullbacks, and we see many stocks not extended and close to support levels. We recommend accumulating favored areas as these rolling pullbacks occur beneath the surface.

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