Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
On one hand, technical indicators are becoming encouraging; while on the other hand, economic data (and fundamentals) are weakening. Oftentimes, the technicals will improve prior to the fundamentals (particularly out of bear markets), so this grabs our attention and supports our view that trends may be turning. However, we also do not believe that equity markets are ready for sustainable upside yet with the Federal Reserve (Fed) still tightening (and unlikely to quickly pivot), economic indicators weakening, lower EPS estimate revisions, valuation not at “washed out” levels, and the market still in an overall downtrend. We remain positive on equity market returns over the next 12 months, but headwinds to durable upside remain in the shorter-term.
Many things technically have improved, but (ultimately) the big picture has not changed yet – the dominant trend is still down for now. The S&P 500 has been capped numerous times over the past year at its downtrend line near the 200-day moving average, and yesterday’s weakness came from that point. What we are watching following yesterday’s weakness is if the pullback gains momentum in the coming days or is quickly shaken off. Overall, we believe the net result is a market that may become more range-bound over the coming months, potentially between ~3700-4300. For the pragmatic investor with marginal cash, we recommend accumulating on weakness and building allocations over time as the trend continues to evolve.
Q4 Earnings Season: It is only just the beginning of Q4 earnings season, but so far results are coming in below historic averages. 63% of S&P 500 companies are beating estimates by 4% (versus 15-year averages of 70% and 5.4%, respectively). Guidance is also being cut with 2023 earnings estimates moving broadly lower. For example, the banks are setting aside extra reserves for an expected rise in loan delinquencies. Performance has been mixed so far on results with an average 1-day price change of 0.2%. Whereas stocks were able to rally in Q3 earnings season, they were also coming off their lows with better-than-expected inflation data. With the average S&P 500 stock now well off its lows, weak results this earnings season may be more of a headwind. Q4 earnings season ramps up next week with 85 S&P 500 companies reporting.
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