Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 rally paused over the past week, after recovering roughly half of its -34% plunge from 2/19 to 3/23. With the index just under its 50 day moving average (following a 27% move off the lows) and a band of technical resistance from 2901-3136, we would not be surprised to see equities pull back in the short term. We also believe that market bottoms are a process, as it would be very unusual for the S&P 500 to simply V-bottom back to previous highs. It is more normal in recessionary bear markets to have a “grind it out phase” where the market can rebuild itself internally for a more durable path higher. Thus, we would reserve some buying power to accumulate pullbacks. Initial downside technical support is 2644 with more support at 2538 and 2455.
Q1 earnings season is moving along with 23% of S&P 500 companies having reported thus far. The market response to results has been generally positive, ex-Financials. The banks have had to take on large loan loss provisions which has added to their earnings impact in the current environment. Some of the best earnings reactions have come from Technology-oriented stocks, as supportive results were needed following very stable estimate revisions heading into earnings season (along with strong relative performance this year). Overall, the S&P 500 is now expected to see a -14.4% earnings contraction in Q1, with the majority of weakness from the Energy, Consumer Discretionary, Financials, Industrials, and Materials sectors. These stocks have, accordingly, felt the brunt of the weakness in this bear market. Whereas, sectors with the most stable estimate revisions- i.e. Health Care, Technology, and Consumer Staples- have seen some of the best performance.
For the full year 2020, S&P 500 earnings estimates continue to cascade lower, toward our estimate of $130. We continue to believe the trajectory of the recovery will be more important for the equity market, where we expect directional improvement in the back half of this year and into 2021. However, the deteriorating earnings picture, accompanied by the sharp market rally, has brought the S&P 500 P/E on a next 12 month basis (NTM) up to 19.1x. This is above the P/E (NTM) at the market peak on 2/19. While it is normal to see higher multiples on lower earnings, the lofty valuation in conjunction with all of the uncertainty and challenges remaining (in regard to testing, therapeutics, virus spread, restarting the economy, etc.) contributes to our recommendation of patience in the short term. In fact, the S&P 500 currently trades in line with our base case 2020 S&P 500 target of 2797. The current virus situation is fluid, and details can quickly shift toward our upside case (3128) or downside case (1914). However, with the risk/reward balanced fundamentally in our view for the short term, we would look to be more aggressive on a market pullback.
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.