Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
The S&P 500 is in the midst of its fourth ~10% oversold relief rally this year, up 8% from its mid-June lows. A positive development in the current bounce that differs from the previous ones has been broad weakness across the commodity complex, indication that underlying inflation drivers are improving. While this is progress, there remain a multitude of headwinds for the market to move sustainably higher and the predominant trend is still downward for now. Despite this bear market likely having more challenges before all is said and done, it is important to remember that the odds of strong long-term returns from current levels are stacked in investors’ favor. We believe economic and fundamental weakness is on its way, but a lot of negative news has been priced in with the S&P 500 -24% off its highs. We encourage long-term investors to focus on the bull market opportunity on the other side of the current weak trend, rather than overemphasizing what may be left in this bear market.
Q2 earnings season has begun, and results have generally been as expected- an ability for the majority of companies to meet or beat estimates slightly, but for guidance to be tempered. Forward earnings estimates are rolling over, and we believe this will continue. High inflation is resulting in lower disposable income and savings rates. Accompanied by weak asset prices, real consumer spending is likely to be slow- weighing on sales growth and, in turn, earnings growth as high input costs dent margins. Nonetheless, we believe economic weakness will likely be relatively mild. Corporate balance sheets are not over-extended, supply has been hard-pressed to meet demand this cycle, and banks are very well-capitalized. Moreover, we believe inflation is set to moderate over the coming months which should ease economic strains and Fed policy in the aftermath.
With this in mind, we would continue to use the market downdrafts as opportunity. The market will bottom before the economy and fundamentals in our view. Technically, there have been some positives in the recent rally- but overall, we still need to see more before raising conviction that the recent lows can prove durable. And with the Fed firmly in a tightening cycle (an additional 7-8 more 25bps hikes expected this year), we do not believe equities are ready for sustainable multiple expansion quite yet. In sum, the S&P 500 is experiencing a good oversold bounce on underlying inflation progress, but this bear market likely takes more time. That said, a lot has been priced in already; and we believe investors should be more interested in positioning for the next bull market at this stage.
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