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April 1, 2021

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

Q1 2021 is in the books with the S&P 500 up 5.8% to begin the year, making it the fourth consecutive quarter of positive returns. The underlying performance remains very broad with 91% of S&P 500 stocks above their 200 day moving average, and the average stock nearly doubling the headline index’s year-to-date return at 11%.  This bodes well for intermediate term performance, and also highlights the market rotation that has dominated performance- with outsized gains coming from areas most levered to an economic reopening, while last year’s technology-oriented leaders largely have consolidated their prior strength (acting as a source of capital for the “reflation trade”). We remain broadly positive on equities, and continue to recommend a pro-cyclical approach to portfolio positioning. But we would also not be surprised for the historically strong gains experienced over the past twelve months to become more normal (with normal pullbacks) over the next 12 months. Continue to use weakness in favored sectors and stocks as buying opportunities.

While Q1 market momentum was supported by unprecedented amounts of fiscal stimulus (along with continued Fed support) and a ramped-up vaccine rollout, the path of infrastructure spending and higher taxes will become a larger piece of the narrative in Q2. President Biden released phase one of his infrastructure/tax plan yesterday, which reflected ~$2T in infrastructure spending paid for by ~$2T in new corporate taxes. The proposal would take the corporate tax rate to 28% from 21%, and incorporate a global minimum tax rate of 21%. Phase two is likely to be released on April 12th or 19th with more “social” spending paid for by personal taxes. These proposals are a starting point for Congressional discussions (i.e. may ultimately be “watered down”) and are likely to take months to iron out. Whether these two packages move forward individually or combined is also an open question, but something significant is likely to get done this year. For further details on the infrastructure bill, please see Raymond James DC Policy Analyst Ed Mills’ report HERE. Overall for equities, we do not believe the potential for higher taxes outweighs the massive stimulus supporting the economic reopening and recovery ahead.

Q1 earnings season will begin in two weeks, and growth numbers should start to become robust (from last year’s low base). S&P 500 earnings are expected to grow over 21% y/y this quarter- led by Consumer Discretionary (72% growth), Financials (71%), and Materials (48%). While deep cyclical areas have been the beneficiaries of sector rotation in recent months, Technology (last year’s “pandemic winner” and underperforming in the sector rotation) is also expecting strong 23%+ earnings growth. It will be interesting to hear from these companies, and assess the market reaction for clues on the next leg of sector performance.

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