February 26, 2021
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Covid trends continue to move in the right direction with new cases and hospitalizations both down over 60% since early January, as vaccinations ramp up with over 12% of the US population already receiving at least one dose. This is allowing states to relax stay-at-home measures, and estimates show a supply surge could be coming (JNJ vaccine could receive emergency use authorization in days) that may allow for the majority of Americans to have access to a vaccine by summer. This supports our belief of an economic reopening as 2021 transpires, and the current trajectory suggests this could begin unfolding sooner rather than later.
In addition, fiscal and monetary policy remains very accommodative. Following $900B of fiscal stimulus to begin the year (4.2% of US GDP), Congress is currently in negotiations over a proposed $1.9T which is likely to be followed by an also enormous infrastructure spending package. At the same time, the Fed remains accommodative and has not wavered from its current dovish stance. Collectively, the economic reopening and unprecedented level of stimulus are likely to result in very strong economic growth this year (above consensus estimates).
Q4 earnings season continued the strong fundamental recovery exhibited over the past couple of quarters. 79% of companies beat their earnings estimates by an aggregate of 14.8% (well above the long term average of 4.5%). S&P 500 Q4 earnings are now set to finish positive on a y/y basis with a large fundamental rebound occurring in 2021. Current consensus estimates reflect S&P 500 earnings growth of 24% in 2021, and we see the potential for significant upside to this in the event that the economic re-opening and additional fiscal stimulus go as planned. Valuation is extended with the S&P 500 P/E at 27.5x and this should begin to normalize as earnings recover. Additionally, the rise in interest rates is a headwind to equity multiples, since record low rates contributed to their high valuations. However, rates remain very low still and are rising due to stronger economic growth expectations (not tighter monetary conditions). Accordingly, we do not believe multiple contraction will outweigh earnings growth in our expectation for higher equity prices in 2021.
We welcome today’s market weakness as a necessary occurrence to wring out some excesses building in the equity markets. The first area to watch is near the 50 DMA (3806), which has generally been the lower bound of the S&P 500’s upward trend since positive vaccine news in early November. Below this, we see technical support near 3680 and 3600 (4-7% below current levels). The pullback is occurring from a solid technical backdrop, and as it occurs will provide healthy gains for forward returns over the next 6-12 months. Given our positive view on the economic and fundamental recovery ahead, we would use the pullback as an opportunity to accumulate favored stocks.
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