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

Short-Term Summary

Since its low on March 23rd, the S&P 500 has been able to bounce 25% in just over two weeks (still remaining 17% from the Feb. 19th highs). The rally has been impressive in our view, with strong breadth readings in the midst of higher lows and higher highs. Following record stimulus from the Fed and White House, the market rally has continued its upward trend on recent optimism over the spread of the virus. There have been preliminary signs that the number of new cases could be stalling in some recent hotspots, such as New York City as well as some harder hit areas globally like Italy and Spain. Investors will continue to pay close attention to the spread of the virus, as a plateauing of new cases and eventual prolonged reduction of new cases will lead to discussion about restarting the economy (this is what we will be monitoring next). The challenges and uncertainties still remain high. Although we believe the market is in a bottoming process, we expect volatility to continue. As such, we would use pullbacks as opportunities for long term investors to continue accumulating the current bear market.

Along with hopefully gaining better clarity in the coming weeks over the virus spread, we will also hear from companies as they report their Q1 earnings results (beginning early next week). Consensus estimates for Q1 S&P 500 earnings have been revised 9% lower since February, now reflecting a -7.7% y/y earnings contraction. Of course, the height of the virus impact is expected to come in Q2 where S&P 500 earnings estimates have already been lowered by 20% and reflect a -16.5% y/y collapse. We have also revised our earnings estimate for 2020 lower, as the economic deterioration has intensified over the past several weeks. Admittedly, there remains vast uncertainty in economic as well as fundamental estimates currently. For this reason, we believe investors should turn their focus to the eventual recovery, as 2021 earnings and the trajectory of the economic recovery will be more important in our view.

Base Case Outlook: Our earnings and S&P 500 targets assume the US economy begins the rebuilding process between Memorial Day and 4th of July (consistent with Raymond James Health Care Policy Analyst, Chris Meekins). We assume that there is a U-shape pattern, with the bottom of the U not extended. Therefore, economic growth picks-up in Q3, Q4, and into 2021 leaving 2020 earnings around $130 (-20% y/y) and improving to $160 (3% GDP growth) in 2021. Applying a 19x P/E multiple and discounting back one year, we arrive at a year-end 2020 price objective of 2,797. With the current situation so highly fluid, the odds can quickly shift toward our upside (3128) and downside (1914) scenarios. These are discussed in-depth in our Q1 Equity Market Outlook (linked here).

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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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