March 19, 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 hospitalizations down over 70% from the peak in early January, new daily hospitalizations down 90%, and new cases down 78%. Vaccinations are also ramping up with 65% of all 65+ year old Americans and 28% of all 18+ year-olds having received at least one dose. This is allowing states to relax stay-at-home measures. And as the economy appears set for a reopening, the Treasury is sending out stimulus payments from the $1.9T bill passed by Congress recently. Meanwhile, the Fed kept rates unchanged at its FOMC meeting this week, not wavering from its dovish stance and the majority of Fed officials expecting to maintain a 0-0.25% fed funds rate through 2023. All of this contributes to our positive view on the economic recovery set to transpire this year. In fact, the Fed increased its GDP growth estimate for 2021 to 6.5% (from 4.2%) and for 2022 to 3.3% (up from 3.2%).
The improving macro backdrop- vaccinations indicating a reopening of the economy as 2021 transpires, boosted by unprecedented levels of fiscal and monetary stimulus- continues to result in an upward trend to analyst earnings estimates. We have an above consensus $190 S&P 500 earnings estimate for 2021 which reflects 37% earnings growth y/y. The best earnings growth is expected from the hardest-hit areas in 2020, and the best estimate revision trends continue to come from Energy, Materials, Financials, Tech, and Comm. Services.
As earnings recover, valuation should normalize from elevated levels. The surge higher in interest rates is resulting in a quicker re-rating for some of the higher relative valuation areas (i.e. tech-oriented), however credit spreads remain low- indicating a lack of pressure on corporations from higher rates beneath the surface. We continue to believe that rates are rising for the right reasons- better economic growth expectations- rather than tighter monetary conditions. In fact, the Fed reiterated its dovish stance yesterday and committed to maintain asset purchases of $120B/month. For these reasons, we believe that valuation normalization will not outweigh rapid earnings growth in the year ahead. We use a 22x base case P/E assumption (from 27.2x now) to achieve our 4180 S&P 500 price target.
Technically, the S&P 500 was able to rebound from its ~4.5% pullback to reach new highs this week. As has been the case in recent months, the advance was broad and driven by the most cyclical areas. The strong market breadth (in tandem with the rise in rates) not only supports intermediate term technical momentum, but also our view that rates are rising for the right reasons. In the short term, the market may need to consolidate its 5.5% two-week advance, but we continue to recommend using weakness in favored sectors and stocks as buying opportunities.
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.
Retirement & Longevity How to make your retirement rewarding and meaningful. Does the conventional...
Markets & Investing March 27, 2023 Doug Drabik discusses fixed income market conditions and offers...
Markets & Investing March 24, 2023 Review the latest portfolio strategy commentary from Mike Gibbs,...