Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Despite a busy week on the earnings calendar, the second consecutive quarter of negative GDP growth, and a 75 bps rate increase by the Fed, the S&P 500 continued to build on its bear market rally, breaking out above the gap at 4017. Bottoming is usually a process and during this year’s bear market, we have already seen three prior bear market rallies with 10% relief off oversold levels, before quickly rolling over and moving to new lows. While we are not saying this time is the same, we will need more evidence of sustained upside before increasing our conviction that the lows are in. For now, we believe this remains a counter trend rally as the market is in overbought territory, the predominant trend is lower, and defensive sectors remain leadership. However, if the S&P 500 is able to break above the 4162-4200 and some broadening out of participation, investors can start to buy dips rather than sell rips.
Q2 earnings season continues to progress as expected as companies generally have seen a 2.4% EPS surprise as 68% of companies have beat earnings expectations. While this is positive, this is below the 5-year average of 8.8% EPS surprise and 77% of companies beating expectations. The softening macro mixed with elevated inflation has resulted in some moderation in earnings expectations. We would expect this trend to continue as we remain below consensus expectations for both 2022 and 2023 at $220 and $215, respectively, vs. consensus of $225.54 and $244.37. Generally, price reaction has been challenging this earnings season with the S&P 500 with only one sector seeing positive returns in the 3-days following earnings announcements. Not surprisingly, this sector (Consumer Staples) is the sector seeing the largest earnings surprise this quarter. On the other hand, Communication Services is seeing the worst stock reactions following earnings, and this sector is also seeing EPS surprises to the downside.
That said, a lot has been priced in already, but volatility could pick up as seasonal forces along with the S&P 500 trading at the upper end of the recent trend. However, we encourage long-term investors to focus on the bull market opportunity on the other side, rather than overemphasizing what may be left in this bear market.
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