Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
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).
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.
Economy & Policy March 20, 2023 CIO Larry Adam outlines the positive events that are outweighing...
Markets & Investing March 20, 2023 Doug Drabik discusses fixed income market conditions and offers...
Markets & Investing Recent market activity and rising interest rates have investors thinking twice about...